Our expectation of "recovery, yes; growth slow; profits mediocre" has been rather backed up by the latest data from the USA: disappointing US manufacturing orders, investment banking sackings, large declines in vehicle sales. Growth will be inherently constrained because it is so dependent on cheap money, which is in turn sustainable only so long as growth causes no inflation. Now, to an already rather grey outlook, comes another external event, the Israeli-Palestinian conflict. The whole world is held to ransom while the two sides battle it out for a military solution, which is simply impossible. A political solution is on the table but ignored, not least by the USA, the only country with the power to impose a solution from outside on both parties. The world is on hold both in economic terms and with regard to other unresolved issues, especially Iraq. It is hard to imagine even super-confident (over-confident?) America attacking Saddam while the Holy Land burns.

The immediate impact of the current conflict is, of course, dearer oil. The one issue that can galvanise the Arab members of OPEC to use the oil weapon to hit the USA, and therefore (and least in their eyes) Israel, is Palestine. Yes, OPEC is weaker than in past Middle East crises, thanks to the North Sea and Russia, as well as to the member states' own need for unbroken oil earnings. Yet the danger of a crude price hike is very real, even if there has not been so much as a hiccough in deliveries so far, and the latest rises in crude prices show it. Dearer oil means inflation, which means interest rate increases so much sooner than expected and when they can least be afforded. The result: stagnation.

Let us put the bleak prospect of an oil crisis to one side while awaiting developments. The news in Europe is not too bad. Manufacturing is picking up. The refusal of the ECB to drop rates drastically а la Fed has certainly made the recovery slower, but possibly firmer. It is still very difficult to rejoice over Euroland's outlook when, among barriers to a pro-enterprise culture, France looks like choosing a President who says he sincerely believes that his country can become richer by working less.

In the meantime, in the UK, the politico-economic climate is becoming ever more pro-enterprise and the results are really showing. The political and economic gap between Euroland and the UK is widening, and joining the EMU looks less and less attractive. If there is a problem in the UK, it is that, like the Americans, the British seem a little too willing to take on debt both to spend on consumer products and services and to push up property prices. Household debt now exceeds yearly income, and such spendthrift ways are vulnerable to rate rises. It is the US situation on a reduced scale, albeit with a somewhat healthier net debt position to the rest of the world.

An admirable analysis of US PEs has been conducted by DKW (Canada). They have taken estimated five-year forward earnings for the S&P500 to compare current averages with past trends. They have a current 19, versus an historical average of 11. Compare this with our "32 vs. 16" that we wrote of a fortnight back. The message about stock overvaluation is the same everywhere you look. Echoes of Japan in the 1980's: the party looked like it would never stop, but it did in the end!

The $3 billion line of credit to ABB must serve as a lifeline to deal with the company's excessively short-term borrowing, and the alleged $2 billion asbestos claims and $1.4 billion under-funded pensions. In a way, the problem of companies like NTL, KirchMedia, GE and ABB, which have over-extended their short-term debt, is the reverse side of the coin that says lenders should stay short. It would be unusual for the same advice to apply equally to both borrowers and lenders. There is an encouraging side to these corporate difficulties. They appear to be the cause or a sign of the European bond market coming of age, with bondholders becoming much more discriminating and gaining in influence. Even that habitual intervener, the German Government, has got the message, stopped fighting the (fixed-interest) market and let Holzmann collapse.

Our recommendation to fixed-income investors to stay short cannot change in face of future rate moves only being upward, at a rate and timing very dependent on the Middle East.

Recommended average maturity for bonds in each currency
Stay short.

The thin market conditions during the Easter week have caused some sharp movements without however really challenging the major support and/or resistance levels. The Middle East situation is worsening and influencing currencies, metals and crude oil. RBA of Australia has not acted on the interest rates and now all eyes are on the BoE on Thursday to see if a ј% increase is announced.

Consolidation in the well known trading ranges for all currencies is the most likely scenario in the foreseeable future.

EUR/USD: Only a weekly close above 0.8880 or 0.8680 would bring some fresh air and provoke the next move of at least 100 to 150 points.

USD/CHF: Despite the unease of the SNB about the strong CHF and the Bank's action on short-term interest rates, the U.S. unit is struggling to sustain levels above 1.6800. On the downside, movements below 1.6500 remain short-lived, but further escalation in the Middle East could see additional CHF strength

USD/JPY: The U.S. unit has created a solid base above 131.50, but still has a lot of difficulty to overcome 134.30. Despite the fact that we can see no reason for a higher yen medium term, some consolidation in the above-mentioned range may be expected. Only a clear break of 130.00 or 135.50 could generate a fresh move of at least 200 points.

EUR/JPY: The bottom has gradually moved higher from 115.00 to 116.50. Next targets remain 117.80 followed by 119.00. Here as well some consolidation in a 115.50 to 118.50 range may be expected.

USD/CAD: We are keeping our short position USD/CAD at 1.5955 with a S/L at 1.6300. The price objective is still around 1.5650.

AUD/USD:Support levels have gradually moved higher, and the 0.5230/50 area looks quite solid for the moment. A weekly close above 0.5350 is needed to head in the direction of 0.5450. Consolidation first.

GBP/CHF: So long as the exchange rate stays above 2.3850, the GBP remains well supported and the next targets are 2.4000 followed by 2.4250. Any break below key support of 2.3850 would open the door again for 2.3550.