Bond Outlook
[by bridport & cie, September 5th 2001]
Clutching at straws or a herald of a recovery? The NAPM data
can be and are being taken both ways. Even the US markets became confused,
with the "knee-jerk" rally largely dissipating by the end of the day, and
European markets today continuing their weakness. |
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An opportunity to become the biggest computer company in the
world or desperation measures? The same extreme "either/or" doubts
arise about interpreting the HP/Compaq merger. |
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The second question is the easier to answer. Most mergers reduce
shareholder value. The last merger involving Compaq did this very well,
while destroying jobs and engineering skills even in a booming IT market.
Why on earth should it be any different this time? In fact, the
shareholder wealth destruction began the very moment of the announcement.
It has only just begun. |
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But to return to the first question. It is worthwhile recalling
that every bear market has the occasional rally. Moreover, fundamentals
have not improved. The only "good" data are that inflation is under
control, but even that may be hiding a threat of deflation. Profit margins
on industrial and consumer products are being relentlessly squeezed -
volume without margin. Where is US manufacturing finding new orders? It
cannot be IT, as even Dell struggle. It cannot be telecom as
over-investment by customers combines with over-indebtedness by suppliers.
It cannot be automobiles as sales in August continued to decline. It must
be furniture and house parts. Is this enough to build an economic
recovery? Forgive our scepticism. |
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Consider also the DJIA and its average PE, which has now gone up to
over 25. It has only gone up because share values have not fallen
enough to keep up with falling profits. It will take a serious
improvement in profits to justify a stock price rally. Profits are still
falling and even to guess at an improvement in Spring 2002 can only be
based on faith. |
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The dollar has reversed (temporarily) its declines with this
renewed hope (however ill-founded) for a stock price rally. Yet again the
fundamentals (notably the trade gap and the M&A flows) speak against a
sustained recovery of the USD. We have no reason to change our positive
expectations about the "euro in the pocket" from next January.
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All of
which leads us to the question of where to go in fixed-income investments.
Clearly investors, frustrated at their inability to make gains in
equities, are looking to bonds for returns that have the merit of at least
being in positive territory. However, they still want yield, even in an
environment of corporate down-grading. We believe this to be the
explanation of the narrowing of corporate spreads so far this year. It is
not so much that investors like to take on credit risks, but they can see
no better way to achieve that extra 1% or so in yield. At bridport we
remain as cautious as ever about corporate bonds, because of the way
increased risk can be revealed overnight (that said, we did see and we
warned of the telecom dangers well ahead of the collapse). For extra
yield, we favour sovereign bonds in the emerging market. Our long-term
faith in this view has actually been reinforced by yet another IMF bailout
of Argentina. Not that we recommend Argentinean bonds, as we suspect that
this a case of problem postponed, not solved. However, the IMF decision to
bailout rather than "ring fence and let go" shows the international will
to prevent default in sovereign bonds. Admittedly there is a huge gap
between the bonds of developed countries and emerging markets (Mexico is
the only intermediate quality and its bonds are very expensive). Our
thinking is that selective bond picking in Latin America, Eastern Europe
and Russia is the better way to match risk and
return. |
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Our own
clients are still clearly fixed on lengthening and on increasing the
proportion of euros in their portfolio. Lengthening is certainly the right
approach faced with a risk of deflation. |
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Already our
hope expressed these last two weeks that Europe can either lead or jointly
lead the way out of recession looks more fragile as KPN, Marconi and
Swissair all compound the severity of their problems. Nevertheless, the
reduction of German unemployment is encouraging. The British public are
not yet willing to slow their spending on goods and housing. The parallel
with the US overspend is all too glaring. |
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Recommended average maturity for bonds in each currency
(changed 08 and 15.08). |
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No change
to the long maturities we now
recommend. |
Currency: |
USD |
GBP |
EUR |
CHF |
As of
08.08.01 |
2006 |
2006 |
2007 |
2010 |
As of
15.08.01 |
2008 |
2006 |
2011 |
2010 |
|
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Last week the ECB finally cut its rates by 0.25 %. The downward
pressure on the US equity markets had a negative impact on the dollar, as
well as on the European stock markets. However, the EUR/USD failed to
break its major resistance zone at 0.9230/50, neither did USD/CHF have a
weekly close below its major support at 1.6510/30. |
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Finally yesterday (after a long weekend in the USA) there were some
encouraging NAPM numbers for August (at 47.90 vs. expected 44), with new
orders at 53.1, back above the key 50-level not seen since last June.
Production is back at 52.20, the highest since July 2000. After the strong
housing figures last week, these are the first signs that the US economy
is starting to turn around. |
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Such numbers gave the dollar a great boost, putting USD/CHF back
above 1.7000, with EURO/USD below the psychological barrier of 0.9000 at
0.8850. |
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No change on Japan, more and more capital flows are being detected
going back home in context with the book closing end of September and also
covering up losses from a battered Nikkei. Repeated verbal interventions
by monetary officials to weaken the yen are still without effect.. Only a
rapid move below USD/JPY 118.00 might provoke the BoJ to step into the
market. |
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No change regarding Japan. More and more repatriated capital flows
are being detected in the context of the book closing end of September,
and of covering losses from a battered Nikkei. Repeated verbal
intervention by monetary officials to weaken the yen remain ineffective
for the moment. Only a rapid move below USD/JPY 118.00 might provoke the
BoJ to step into the market. |
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EUR/USD: After breaking the 0.9000
support area, our first target of 0.8850 was reached. Next objectives on
the downside are 0.8820 followed by 0.8710 while 0.9010 is acting now as a
formidable resistance. |
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USD/CHF: The decisive break above
1.6800 triggered a lot of S/L and the dollar is now comfortably above the
psychological barrier of 1.7000. Next targets 1.7130 followed by 1.7350
with 1.6950 acting as a big support zone now. |
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USD/JPY: Same comment: the verbal
interventions by the Japanese have put a floor around 119.00 but sooner or
later capital flows might bring about a test of the BoJ. Any loss of the
support area at 118.00 should cause a rapid move direction 115.00. USD/JPY
121.30 still acts as a major break out level on the topside with first
target of 123. |
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EUR/JPY: As capital repatriation
continues, a lot of pressure forced the EURO/YEN below 108.50 and S/L
there triggered a move down to 105.50. The next target is 103.50 but,
contrary to USD/JPY, which is behaves in a fairly stable manner these
days, market participants should remain very careful about intervention by
the BoJ (who do not like rapid moves). Topside limited to 108.50, followed
by 111.-. |
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USD/CAD: We have been stopped at 1.5480
on our short position est. at 1.5480. Large trading range expected in
1.5350 to 1.5650. Any excessive weakness above 1.57 should be used to buy
CAD. |
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AUD/USD: After breaking 0.5280, the
Aussie nearly tested 0.5400. However, it could not confirm its advance and
gave up gradually most of its gains as it went back down to 0.5200. The
next support is at 0.5150 (major 0.5050), while 0.5280 remains the upside
resistance level. We remain positive medium term and see a higher
AUD. |
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GBP/CHF: The pound easily broke
resistance at 2.4350 and nearly reached 2.47. This cross will remain very
volatile with 2.4980 and 2.5100 as next targets. Support comes in at
2.4460, major 2.4350. -. |
|
USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.7130 |
0.9010 |
1.5250 |
121.30 |
108.50 |
Current spot
level |
1.7070 |
0.8865 |
1.5130 |
119.40 |
105.80 |
Support/Breakout |
1.6950 |
0.8820 |
1.5050 |
118.00 |
104.80 |
|
AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.5280 |
0.4450 |
1.5650 |
1.4650 |
283.00 |
Current spot
level |
0.5200 |
0.4310 |
1.5585 |
1.4420 |
272.00 |
Support/Breakout |
0.5050 |
0.4260 |
1.5350 |
1.4380 |
268.00 |
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