US interest rates are approaching their bottoms, either because the economy will finally return round and inflation become the risk or because there is no room to go lower. In the UK, the return of house price inflation and of robust consumer spending means at least a temporary stay in further monetary loosening. In contrast, the ECB seems likely to cut further in the New Year and the SNB even sooner. The general expectation that rates have little further to fall has led many corporations to issue new debt (often convertible), basically to refinance at lower cost (rather than to invest). In addition, interest is emerging on the investor side in floating rate notes, although, not surprisingly, the supply is limited.

The large supply of corporate bonds coincides with the Enron collapse and high default rates in high-yield bonds. Corporate spreads have begun again to widen. Evidence of our contacts with market makers is that they are making room on their own books for the new issues, in expectation that final demand will fall short of the level issuance. That can only lead to further increases in corporate spreads. The Enron saga is just one more example of the ever-present risk of mauvaises surprises even with the best-rated corporates, and, incidentally, of the habit of the rating agencies to issue their warnings post facto.

The Argentine disaster continues to unwind in slow motion. The choice now seems to be default + floating vs. default + dollarisation. Bond investors with strong risk-acceptance may find nuggets of opportunity in, for example, outstanding Brady Bonds, but for the great majority of investors our advice to get out was and remains absolutely valid.

It is exceedingly hard to find chinks of light about the economy anywhere in the world. The UK, maybe, but it looks remarkably like a mini-USA with consumer spending high, but stagnant industrial output and problems in the service industries. Encouraging news is that microchip orders have bottomed out, and the SIA is predicting 6% growth next year. Even then, absorption of excess capacity and a return to respectable profit levels is unlikely before 2003.

Europe is being held back by the dead weight of Germany, while the high consumer spending of France and elsewhere looks very much like people getting rid of undeclared cash before the euro arrives. The common currency will have a remarkable, and generally, positive impact on the European economy. Price differentials between countries must come down as price comparison becomes so easy. Competition must increase as other companies in the euro zone appears less foreign. Thus the net result of the euro will further disinflation, hopefully linked to significant industrial restructuring and increased competitiveness. How ironic that the old power house of Germany is now the hindrance to progress, from its sabotaging the EC's takeover code to its being first to break the terms of the stability pact (which needs to be broken, or at least seriously modified, anyway).

The negative example of Japan and the positive example of the UK show how reform of politico-economic structure and practice is an essential step for countries to move from their mindset of "rebuild after WW2" to "compete internationally in the 21^st century".

Despite our reservations about reform in Euroland, the euro is a fascinating venture. It is not surprising that Tony Blair is quietly optimistic that he can pull the British public round as they see what happens on the Continent, and the euro becomes part of life even in the UK. He and Gordon Brown may turn out to be the heroes who avoided recession in the UK while to be tied too closely to Euroland was negative, but timed eventual entry to the EMU to perfection. Forgive our fantasies if that is what they are. We admit that euro success is yet unproven; but then so is the supposed recovery of the US economy in early 2002!

Our hope expressed a fortnight back that the Mideast peace process might benefit from a new even-handedness by the US Government were soon tragically dashed by the mutual terrorism of the parties. When will the US and Israel pay some attention to those old UN resolutions? We can thank Russia and its new friendship with the West that OPEC 's current strike should only be of limited impact.

Recommended average maturity for bonds in each currency
Shortening is continuing, with some clients investing in FRNs, but overall we leave our recommended average maturities at five years.

As usual in the pre-Christmas market, liquidity is becoming very thin. It looks like that national CBs are supporting the euro below 0.8800. We suspect that they would like to avoid bad publicity with the introduction of euro notes and coinage at the beginning of next year. This Friday, the SNB, in its last meeting before year end, is expected to lower interest rates one more time (market expectation. 0.50%). Likewise the Fed next week (by a 0.25% cut in the Fed Funds).

EUR/USD: Support for the euro has moved up from 0.8800 to 0.8880, but 0.8980 to 0.9010 is still acting as a major resistance, which would need to be broken on a weekly basis to make further progress on the upside. Key support comes in at 0.8750.

USD/CHF: Same comment as last week: the 1.6480 to 1.6530 area remains key. A weekly close above would suggest retesting resistance at 1.6750 to 1.6800. Only a close above this level would imply further progress in the direction of 1.7000.

The downside remains open with 1.6380 and 1.6250 as the next key supports. Keep in mind that this currency pair remains extremely volatile

USD/JPY: Despite managing to see a high of nearly 124.60, the US unit has come off quite substantially. A broad trading range is finding good support at 123.50, 122.50 and 121.30, with the BoJ protecting the 120.00 area. It is difficult to see the dollar moving above 125.50 in the short term.

EUR/JPY: The exchange rate is approaching the topside of the recent trading band, and the 111.30 to 111.60 looks tough to break. A weekly close above these levels would speak for a move in the direction of 112.80 followed by 114.--. Supports are coming in around 109.90 followed by 108.80.

USD/CAD: The CAD has appreciated quite substantially and broken the important level of 1.5850. We are keep our long CAD position established .at 1.5990 and are lowering our stop profit to 1.5830. Our price objective in this move is 1.5650.

AUD/USD: Same comment as last week: the Aussie has created a solid base above 0.5000 and solid support is already coming at 0.5110. Topside should be to the 0.5280 to 0.5310 level.

GBP/CHF: Extreme volatility in this cross will continue. A broad trading band is developing between 2.3100 and 2.4100.