The sense of the world order going through a wrenching change over the divisions linked to Iraq and international consensus has its parallels in financial markets. Last week we mentioned that investors are no longer taking much notice of perpetually bullish advice on equities and corporate bonds, and that bond market makers are cutting their exposure drastically. To these phenomena may be added the withdrawal from or almost total inactivity of private investors in stock markets, as they can no longer cope with the wild swings in values from day to day. Indeed, hair-trigger reaction is needed to handle such volatility, and only computer-based institutional investors are likely to have such capability. The received wisdom that stock markets always perform best in the long run is wearing thin. The high US PEs leave very little potential on the upside, while technical analysis is stressing the downside risk.

The United States seems to have given up on manufacturing and turned itself into a vast construction site (we exaggerate, of course, to make a point). Americans have even started saving again! (4.3% of revenues in January). Long may that continue. We remain great believers that market forces are acting in the long run to right the US imbalances. If the renewed savings rate continues, it may be added to the weaker dollar as a move in the right direction despite every attempt of the Administration to make things worse. Do not expect, however, any great recovery any time soon. Our "write-off" of this decade for the USA expressed in early 2000 remains valid.

Among the crazier policies of the Bush Administration is the proposed lifting of tax on dividends for the investor rather than the corporation. Equalising the tax treatment of corporate debt and equity is supposed to reduce the bias towards debt, but the Bush approach does not equalise them. Commentators soon spotted that the tax-free status of municipal bonds would be less attractive if dividends were also tax free. Since the bursting of the bubble, State and Municipal budgets have swung from a surplus of $ 58 billion to a deficit of $ 117 billion and growing. This is not the moment for Bush to put up their cost of financing and exacerbate a further imbalance.

In Europe, our cautious optimism has received a set back in France, but a slight boost from euro zone manufacturing data as a whole and from a change in mood in Germany. Business confidence and consumer spending are easing upward, but neither of these is a firm indicator. More significant is that Schroeder is actually reaching the point where most of us were years ago. He now recognises publicly that trade unions have too much vested interest in the status quo to be a partner in the reforms the country so desperately needs. So Schroeder says he will press on without them. We hope so, for all our sakes. Yet even as the Chancellor gets a little puff in his sails, he manages to spill it by criticising the bond rating system, linking it to "Anglo-American business principles". He may or may not be right about the agencies, but having taken such a different route to the USA and UK on geo-politics, does he have to have to trash their economic system, too? Besides, those of us who believe in the system have enough criticisms of our own!

In earlier Weeklies this year we have written about the opposing forces of inflation and deflation, saying that inflationary forces are stronger in the USA and in the UK than in the euro zone. Indexed linked bonds have already gained in value across the board since the beginning of the year, but with no significant trans-Atlantic difference. Inflation is still a fear rather than fact, and has little to do with economic growth in the USA and in the UK, and everything to do with cost-push. "Linkers" make sense as a component of portfolios in such uncertain times.

Some of our clients are still scrabbling for yield among developed countries. Our preference is still for the euro in long bonds of top quality: we expect the ECB to lower rates tomorrow. The SFB also is likely to reduce rates. This would suggest lengthening in CHF, but we cannot make a firm recommendation to this effect, as the long end of the CHF will not necessarily move down with the short end.

Amongst emerging markets, Turkey has now joined Latin American countries in being a huge punt, while only Russia is continuing to show strong improvement in prices as spreads come in, e.g. the 2028 has added 10 big figures in two and a half weeks.

Recommended average maturity for bonds in each currency

We maintain our recommendation for maturities in euro to average ten years.

EUR/USD: In this bearish environment for the USD, the EUR managed to overcome 1.0950 to test quickly 1.10. A weekly close above 1.0950 would be needed to head for the next objective of 1.1200. Crucial support is at 1.0650.

USD/CHF: Here as well, 1.350 zone was broken and 1.3300 reached so far. A weekly close below 1.3350 would open the next price objective of 1.3150. Big break out on the topside, looking far away, would be at 1.3780.

USD/JPY: Same comment: Capital repatriation is still reinforcing the JPY, but market intervention is putting a temporary floor at around USD/JPY 117.00. A weekly close below this would open the door for 115.00. Upside resistance is at 118.20, 118.80 and 120.10.

EUR/JPY: Broad consolidation in a 126.00 to 130.50 range, and trying to test the upside again.

GBP/USD: The key level at 1.5850 has been broken, with support around 1.5700 being tested. In the meantime, the market has again focused on the upside to test the 1.6000 area. Consolidation in a 1.5700 to 1.6100 range is expected.

USD/CAD: As long as the rate stays below the key resistance of 1.5050, the price objective remains at 1.4200, with 1.4700 already been tested. The trend remains your friend!

AUD/USD: Key support around 0.5970/0.6000 area with 0.6180 being tested so far. A weekly close above 0.6200 opens the door for the next levels of 0.6350.