Bond Outlook
[by bridport & cie, February 6th 2002]
The basic policy of the US Government is essentially that if they
keep saying things are going well, all will be well, and all those claims
from economists about the need to rebalance the economy are nonsense. The
Government propaganda may yet prove successful and we doubters quite
wrong. Nevertheless, our view on the fundamentals of the US and world
economy must remain on the side of the critical economists. It is not a
view of total pessimism, by the way. We entertain hopes in the possibility
of traction at the end of this year, although we suspect that the signs of
traction appearing now are not the real thing. |
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The neutrality of Alan Greenspan in his comments on the economy is
now under suspicion. He made a first speech in January emphasising great
caution. Then a number of other Fed Governors plus the Treasury Department
began to contradict him. Accordingly, his second speech took on a more
finely balanced tone, interpretable either way. So far, reassuring words
from worthy officials have "worked": consumers have kept spending and
stock prices kept relatively high. Now doubt about the reliability of
"worthies" is growing. Enron was, of course, the seed for all the current
doubts. "Are there other Enrons lurking?", was the first question. On cue,
Tyco, Williams, PNC Financial, Enterys and Elan (for the US side of an
Irish company) announced the need to restate earnings. From there,
virtually all telecom companies and conglomerates were put under a "can we
trust you?" cloud. Banks, too, are being looked at with suspicion as the
facilitators of opaque structures. What "perfect" timing for Allied Irish
to uncover a $750 million fraud by (apparently) a rogue trader at its US
subsidiary, Allfirst. Again the question: where were the
watchdogs? |
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We have long expressed our old-fashioned preference for share
valuations that reflect equity risk and potential growth in earnings.
Thus, in one sense, we look for a correction of US stock values as
eliminating one of the imbalances of the US economy. Nevertheless, to see
share prices fall because of the shortcomings of the watchdogs of the
system is a source of dismay. The refusal of Cheney to reveal Enron
conversations can only increase scepticism, just as the choice of Enron
executives not to testify just increases the suspicion of wilful
wrongdoing. Slight encouragement can be found in Andersen's CEO,
Berardino, himself testifying instead of sending a subordinate. He is now
calling for sweeping reforms of audit systems. Has a poacher turned
gamekeeper? Was he not supposed to be a gamekeeper all
along? |
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Interest rates have at least temporarily bottomed out, including in
the eurozone and in Switzerland. A further cut or two during the year
remains possible, but the best assumption now looks like no change at the
short end and an eventual rise led by the long end if and when the economy
improves. If the USA has a "double dip", then a further Fed cut is likely.
Otherwise if recovery holds, its very anaemia should ensure rates being
held down. |
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The biggest risk to this scenario of many months at low interest
rates lies in the ballooning US Government deficit. So long as investors
have so little else do with their money, the Treasury may borrow at the
cheap, short end. However, there is a sword of Damocles overhanging the
recovery if the Government has seriously to compete with the private
sector for funds once recovery takes hold. This looks like a return to the
"double deficit" economy of about ten years ago - not a happy
thought. |
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Surveys in Europe show an increase in economic activity and a
flattening of unemployment overall It is difficult to rejoice, however,
when German unemployment has passed 4 million and the German internal
deficit is approaching the 3% limit. How splendid that the EC has insisted
on breaking up the restrictive practices of automobile distribution,
opposed by (guess who), Germany. We would like to write more, and be more
positive about Europe, but, like everyone else, we cannot take our eyes of
the unrolling US situation, on which we are all so
dependent. |
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Crisis deadlines come and go in Japan, the latest being enforced
write downs of banks share holdings as the Nikkei moves towards 9,000. It
is amazing that shares could ever have been kept on the book at purchase
value and above market value. Not even GAAP would have allowed
that! |
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Recommended average maturity for bonds in each
currency Bond investors should stay quite short and be extra
cautious about seeking spread. |
Currency: |
USD |
GBP |
EUR |
CHF |
Over the period
15.08.01 to 21.11.01 |
2008 |
2006 |
2011 |
2011 |
As of
05.12.01 |
2006 |
2006 |
2006 |
2006 |
As of
30.01.02 |
2005 |
2005 |
2005 |
2005 |
|
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After the Enron debacle, the Global Crossing restatements and
Tyco's hidden acquisitions, more and more investors are becoming concerned
on the credibility of accounting practices in the US. With Argentina
postponing again the opening its financial markets and in the light of its
having announced a free float the peso, it is going to be interesting to
see the impact on other emerging markets. In Japan, further downgrades in
the banking sector are underway, and the Nikkei has hit an 18 year low.
Not one day passes without hearing the Japanese PM affirming the need to
act on the slightest sign of financial market instability. With the book
closing at the end of March and a battered stock market, Japanese capital
repatriation could bring about a temporary yen appreciation. Medium term,
we are still looking for a substantially weaker yen. |
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EUR/USD: A weekly close above 0.8730/50
is needed to see the euro heading for higher levels again. The downside
remains well supported at 0.8550, major support is at 0.8480, with a break
looking for 0.8330. |
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USD/CHF: So long as the exchange
rate stays above 1.6780, consolidation in a 1.6850 to 1.7250 pro dollar
environment remains. A clear break either way would target the next
movement of 200 points. |
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USD/JPY: The yen is trading in a
consolidation range of 131.50 to 135.30 for the time being. A clear move
below 131.50 would temporarily open the door, direction 130.00. Levels
around 130.00 should represent a good buying opportunity for medium to
long-term prospects, with our first target of 136.90, followed by 140,
still valid. |
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EUR/JPY: We took the initiative of
establishing 50% of a long EUR/JPY position at 114.50. We put a stop
profit at 114.80 and are looking for a move higher towards 117.50.
|
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USD/CAD: We keep our short position
USD/CAD at 1.5955 with a S/L at 1.6300. Price objective is around
1.5650. |
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AUD/USD: The failure to break 0.5280
again puts the Aussie under pressure. A move below the psychological
barrier of 0.5000 would be catastrophic and putting into doubt all bullish
forecasts for a higher AUD at the beginning of this year. Price objective
then would be 0.4850. |
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GBP/CHF: Extreme volatility will remain
in this cross. 2.3850 is acting as major support now and 2.4450 as tough
resistance. Only a clear break of either level would provoke the next
movement of 200 points. |
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|
USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.7250 |
0.8750 |
1.4880 |
135.50 |
116.50 |
Current spot
level |
1.6995 |
0.8670 |
1.4725 |
133.75 |
115.90 |
Support/Breakout |
1.6780 |
0.8480 |
1.4650 |
131.30 |
114.80 |
|
AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.5280 |
0.4310 |
1.6210 |
1.4280 |
303.00 |
Current spot
level |
0.5070 |
0.4160 |
1.6020 |
1.4140 |
297.50 |
Support/Breakout |
0.5050 |
0.4050 |
1.5780 |
1.4050 |
288.00 |
|
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