Another icon falls. Bernie Ebbers of WorldCom has gone the way of Jerry Levin (AOL Time Warner), John Mayo and Lord Simpson (Marconi) and Kenneth Lay (Enron). Other dealmakers wobble: Jean-Marie Messier (Vivendi), Dennis Kozlowski (Tyco) and David Gent (Vodaphone). They are all losing the trust of investors and, indeed, of their boards. It is a trend we can only welcome on the grounds that "hype", combined with hero worship, is no substitute for responsible investment analysis. If you cannot die on the job, the best way to preserve hero status is to retire near a peak; nice timing, Jack Welch!

The American (and to a lesser extent, the European) financial institutions massively inflated investors' expectation of high returns, and, judging from the e-mails we receive, are still doing it. Fortunately, their song is heard with ever greater doses of "caveat emptor", and, we must admit, the bigger banks and brokers are quietening down. Whether because of the ongoing court investigations, or through recognition of the need for greater responsibility, can be debated. In any event, a subliminal message about the economy is being given by banks' reduced corporate lending. We consider the US Government, or at least certain members of it, epitomised by Paul O'Neill, as lacking in responsibility just as much as the financial services industry. US policy is continually to pump up consumer confidence and simply avoid the real issues. The day of reckoning has been postponed, not cancelled.

Our scepticism about the strength of the recovery and about stock valuations normally pushes us to recommend bonds for a dual role of security and a route to respectable returns (always with the proviso that bonds still require careful monitoring). This week, however, we have to say that security must be given the priority. In recent months, many fixed-income investors have become as aware as we are of the dangers of corporate debt. The result has been a shift towards sovereign emerging markets as a route to higher returns. As a principle, it is one we fully endorse; "overnight" surprises are far less likely in sovereigns than in corporates. However, trends can overshoot, and that is precisely what we feel has happened in emerging market sovereign bonds. Romania, at a spread of 350 over five years, typifies this.

"Where, then," the attentive reader will be asking, "should we be investing to achieve acceptable returns?" Our general picture of several years of recuperation from the excesses of the 1990s, and of expectations of returns being modest for all types of investment, crystallises this week into a recommendation of extreme defensiveness. Cash and Government bonds may be boring, but they are safe! Moreover, it is better to be in one's reference currency in view of the instability of the forex markets.

We already recommended bar-belling for the dollar last week, and extend that to euros this week. The maturities of Swiss franc holdings should now be lengthened. Our reasoning is that Central Banks will be slow to raise short-end rates, while longer-term rates cannot follow because of the outlook for low inflation (always assuming no further Mid-East disasters).

In the gloomy picture of this week's investment climate, Europe has a ray of hope because of its lesser imbalances and exaggeration. However, the forthcoming German strike normally should hit the euro; if it does not, it will be because international investors are no longer stumping up the $ 1 to 1.5 billion dollars per day required to offset the US current account deficit. Despite (or maybe because of) the Germans telling the British that the UK economy is converging nicely with euroland, the EMU looks less and less attractive in the UK. Which Central Bank does the better job, the one in London or the one in Frankfurt? Which is a smarter inflation target, a target of 2.5% or a ceiling of 2%? Which is better, the freedom to invest by government or the privilege of spending and ignoring the Solidarity Pact? If there is a worry in the UK, it is those continually escalating house prices. Such escalation ended in tears in 1989, just long enough ago for people to forget.

Japan is an enigma. We were wrong in supposing that the Nikkei would fall once the end-March window dressing was over. Have investors moved to Japan just because everywhere looks so poor that even slightly good news from Japan pulls investors away from their underweight Japanese positions? What a shame that the modest improvement in exports has encouraged the idea that a recovery can be export-led, delaying true reforms once again. History will confirm that the US and Japanese Governments are on the opposing sides of the same coin. The coin is called "the Ostrich". On one side it has a large ostrich, head well down in the sand, and on the other the motto "Non aspicere veritatam" (freely translated: "let's not face up to the real problems").

Recommended average maturity for bonds in each currency
Bar-bell in dollars and euros, lengthen in Swiss Francs, but no change yet in Sterling.

The next ten days are going to be crucial to see if the euro finally manages to stage a sustained recovery. Overall the supply of USD looks high, while accounting problems, growing deficits, much reduced capital flows towards the US are the major reasons cited for weakness. Behind the scenes, Central Banks seem to be in talks to the effect that the US might tolerate a weaker USD to stimulate its exports and balance the US economy, while, and on the European side, a stronger euro might help the ECB to avoid tightening rates in a still fragile recovery environment. Nevertheless, Mr. O'Neill will today be attempting to justify the US Treasury's strong dollar policy before the Senate Banking Committee.

EUR/USD: : A clear break at 0.9060 (the year's high) might stimulate further euro buying, with 0.9130 as the first target, followed by 0.9340. Downside support comes in at 0.8950, followed by 0.8880. Any weekly close below 0.8810/30 would put in doubt the recent strength of the euro and lead to a move to 0.8700.

USD/CHF: USD weakness caused an aggressive sell-off to test our target of 1.6250 immediately, with a low of around 1.6150. A clear break here would put the US unit under further pressure, and make 1.6030 and 1.5850 further targets on the downside. Resistances to be broken are at 1.6330, 1.6420 and 1.6550.

USD/JPY: Our first target of 127.70 has been reached, and the exchange rate might now consolidate in a broad 126.50 to 130.00 range We remain convinced of seeing further JPY weakness over time as intervention threats below 126.00 become reality.

EUR/JPY: Same comment: the major support zone remains around 114.50/80 and is holding for the time being. The upside is capped by 116.50, 117.20 and 117.80. Any sustained break of 114.50 would see this cross quickly down to 113.00.

USD/CAD: We also took profits on the remaining short USD/CAD position (established at 1.5955) at 1.5620 (+330 pts). We see some consolidation in a 1.5580 to 1.5840 range. We might reconsider re-establishing a short USD/CAD position in the high 1.57s.

AUD/USD: The Aussie continued to move gradually higher but met tough resistance at 0.5450. Major support is now at 0.5330. Consolidation in a 0.5350 to 0.5450 range may be expected.

GBP/CHF: Our pivotal point at 2.3850 was clearly broken and our first target at 2.3650 has already been reached, with a low of nearly 2.3550. Only a clear break of 2.3500 would provoke further GBP weakness, direction 2.3350. Consolidation first.