Week in FX Europe – German Bunds Remain Rich, Gold Slips

Geopolitical risk has short lifespan
• Bund ‘bull' comfortable at lofty heights
• Gold straddles first line of ‘real' support

The news of the shooting down of Malaysian airliner near the Russia-Ukraine border has understandably shaken global markets. Nevertheless, the harsh reality is that during the first half of this year, geopolitical events have had a relatively short lifespan. With the exception of Asia, major bourses were trading in the red for a period of time, and many have managed to claw their way back to being slightly offside or in neutral territory as investors try to close out the week.

Bunds Grind out Gains in Quiet Trading

With the European economy considered a troubled spot, price action in German bunds remain in positive territory for the time being. The reality is that both dealers and leveraged traders seem to be too timid to pull yields much higher ahead of the weekend.

Currently, the 10-year September futures benchmark is flirting with yesterday's high print, eked out on news of the tragic events in Ukraine (148.48). Both U.S. bonds and German bunds are having issues with retreating from their weekly highs due to various risk-aversion strategies remaining in play. It seems that the German bund ‘bull' is more comfortable than their U.S. counterpart in closing out the week trading at lofty heights. Expect U.S. dealers to make room for supply coming down at the beginning of next week.

From a political standpoint, if pro-Russian militants are found responsible for downing the commercial jet over eastern Ukraine, investors should be expecting a rapid escalation in U.S. and European sanctions, which will be extensive and stiff. If there happens to be no escalation of violence, there will be some sellers Sunday into Monday ahead of fresh supply on either side of the pond. Geopolitical event risk is pricing both the U.S. and German curves very rich.

Gold Knows No Risk-Aversion Strategy

The yellow metal has been unable to add to Thursday's gains, and it now is off by close to $30 for the week. Yesterday's jump in higher prices was less than might have been expected given the severity of events that triggered the price rally to $1,326. Lack of interest has helped gold easily slide back to support territory ($1,301). The current top looks solid, at least until the next political move unfolds.

What to Expect Next Week

From a fundamental standpoint, reporting is on the quiet side with flash manufacturing and service purchasing managers' indexes dominating releases for the major economies in Europe. The market also gets some insight into the Spanish jobs situation. Rounding out the week, investors will get a peek at Germany's consumer and business climate conditions.