By Andrew Torchia
LONDON, May 11 (Reuters) - European bond, foreign exchange and equity markets are close to major technical breakouts, which would point to a long-term shift of expectations towards economic recovery and rising inflation.
Breakouts in all three asset classes at roughly the same time would increase the chances that the markets were establishing new trends.
LONG-TERM YIELDS
The 10-year German Bund cash yield
It has since pulled back to 3.40 percent on Monday afternoon, but a second straight close above the February peak would confirm a double bottom formed by the January and March lows -- a classic sign of the reversal of a downtrend. The pattern would target 3.77 percent in coming weeks or months, with initial support for the Bund at 3.58 percent, the 38.2 percent retracement of the yield's drop from June 2008.
A double bottom in the Bund yield would imply a good chance
of a similar pattern forming in the British 10-year gilt yield
A clean break above the February peak of 3.77 percent would trigger a double bottom formed by the December and March lows, pointing up to 4.53 percent in coming months. The chance for a break will remain high while the yield holds its uptrend channel from mid-March, the bottom of which is now at 3.42 percent.
Data suggesting the start of an economic recovery in coming months, such as unexpected rises in Germany's March exports and imports announced on Friday, is partly responsible for the rise in long-term yields. [ID:n8651157]
But they are also being pushed up by the prospect of greater bond supply and concern that ultra-loose monetary policy could eventually lead to an inflation spike.
SHORT-TERM YIELDS
This can be seen in the behaviour of short-term yields. They are not staging technically significant rises, implying the market does not expect economies to become strong enough for monetary policy to tighten any time soon.
The two-year Bund yield
A break above the range would be needed to show expectations for tighter monetary policy were forming. The height of the range implies such a break would target 1.85 percent.
Technical analysis says the yield curve may continue steepening for a while.
The two-/10-year Bund yield spread rose to a multi-year high of 213 basis points on Friday, confirming a break above the 1.60-1.95 percent range which had prevailed since February. That points to further expansion to around 230 bps in coming weeks.
CURRENCIES
The euro
The European currency also rose above the upper edge of a big symmetrical triangle formed by highs and lows since November. Such triangles have served as long-term positive reversal patterns for the euro, most recently in early 2006.
Another close above the 200-day average on Monday would confirm the breakout and trigger the triangle. The euro, now trading at $1.3576, faces initial resistance at the March peak of $1.3737, but in coming months the triangle would point up to levels above $1.50.
Meanwhile sterling's
A second straight close above that level would confirm the break and trigger a double bottom formed by the January and March lows; the pattern would target $1.6040, the 38.2 percent retracement, in coming weeks or months. Sterling is trading at $1.5098 on Monday.
The longer-term outlook for sterling would only start to become negative again if it broke below the bottom of its two-month old uptrend channel, now at $1.4720.
International Monetary Market data for the week to May 5, released by the U.S. Commodity Futures Trading Commission on Friday, suggests room for both the euro and sterling to rise.
The euro swung to a net long 3,368 contracts, a modest level, from a net short 2,073 contracts in the previous week. Sterling has considerable room for shorts to be covered; net shorts fell to 22,437 contracts from 22,913. [ID:nN08572043] STOCKS
The pan-European FTSEurofirst 300 <.FTEU3> index of top shares, which is up more than 30 percent since early March, is nearing a strong resistance area which could well prompt a pause in the equities rally. [ID:nL81021909]
The index, down 1.0 percent at 857 points in the early afternoon on Monday, faces resistance between 878 and 895, where the 23.6 percent retracement of its drop from July 2007 coincides with the January 2009 peak and the 200-day average. But the index confirmed a break last week above its long-term downtrend channel from late 2007, and it has formed a two-month-old uptrend channel.
While it holds the channel bottom, now at 820 points, it will retain a reasonable chance of breaking the resistance and in coming months reaching the 38.2 percent retracement at 1,023.
Any further appreciation by the euro would suggest the chance of a bullish breakout by equities was increasing. Over the past month, the correlation between daily movements of the euro/dollar rate and the FTSEurofirst 300 has been a high 0.81.