A disturbingly strong case can be made this week that the world is in dire straits:

• The war in Afghanistan has returned with a vengeance
• The mutual killings in Israel and Occupied Palestine are escalating
• The Bush Administration has imposed steel tariffs and EU retaliation is very likely
• In Japan profits and capital spending are plunging
• Petroleum prices are rising, and so are the prices of many other commodities.

Little of this seems to matter, however, in a week which has seen major rallies in US stock markets and Tokyo. Such paradoxes are a timely reminder that markets have a mind of their own.

The basic thesis we expressed last week was that US, and therefore world, recovery will be slow and non-inflationary. The consequence is that all returns on investment will be rather mediocre for some time to come. Our thesis does not change because of a return of exuberance to the stock markets. All the same, there is distinct change in "feel" of the market this week, compared with last. The positive performance of stocks has washed over into the fixed income markets, with price falls in many bonds, and spread narrowing among corporates and emerging markets. In other words, there has been a significant swing from risk aversion to risk acceptance.

Whether the shift in emphasis is justified is debateable (we do not think it is, but, as we said above, markets have a mind of their own), and time will tell whether it has staying power. The basic problem is not necessarily to be found in the damaging events listed in our opening lines, but in the incontrovertible fact that the American authorities have not allowed the US imbalances to adjust. One of the implications is that the economy is ticking along, and consumer spending staying high, because debt is now so much cheaper to carry. The best that can be said is that the Fed and Administration have pulled of a "jury-rig" repair, allowing them to sail on, but at a much reduced pace. Put on the burst of speed, and interest will have to rise, knocking the wind straight out of the sails. These considerations reinforce our "sea change" perspective of last week, when we foresaw a long period of modest growth and returns.

One nice effect of the mood change is that much of the overselling of Swiss stocks and bonds seems to have ended. There has been a nice recovery for that engineering company!

The US steel tariffs are a measure of appalling economic illiteracy. Despite the admirable flexibility of the US economy, for which Europe can learn so much, its steel industry is about as reformed and modernised as, for example, Japanese banks. Traditional, bulk steel mills can survive in the face of "mini-mill" competition, only by mergers and rationalisation. The message has been slow to get through in Europe, but it has been put into effect. In the USA, the message is simply rejected and protectionism, the worst possible, "solution" adopted. The USA can now look forward to an indefinitely inefficient steel industry and prices higher than those of the rest of the world. Japanese, Korean and European car manufacturers must be rubbing their hands with glee as their American counterparts have to deal with a high price of the most important raw material. Higher steel prices in the USA will do nothing to help industry to recover, and American manufactured exports to become competitive. Increased industrial costs will either wash through as inflation (hello, increased interest rate!), or further decrease profitability (which is more likely over the short term in view of underused manufacturing capacity).

If we remain sceptical about the US recovery and the recent stock price rally, words, or at least polite words, fail us for Japan. The best the WSJ can come up with to explain the Nikkei rally is that inventories are very low and that a USA recovery will drag Japan with it. Nothing, precisely nothing has been done to put the economy right: banks have piles of bad loans and a huge increase in monetary supply has not reversed inflation. The bankruptcy of Sata Kogyo, a construction firm with nearly $ 5 billion in debt, goes scarcely noticed. The wisdom of the new rule to forbid short selling at less than the last price traded may or may not be a good idea in its own right (it corresponds to US practice), but its hurried introduction now is proving a clever way to inflate stock prices for the March 31 book closing. Thereafter?

Recommended average maturity for bonds in each currency
We glad to have resisted the temptation to recommend lengthening. There is nowhere to move at present from the 3-year averages we recommend.

The decision by the Bush administration to impose tariffs on steel imports to protect its own steel industry clearly shows that the US does not care about WTO rules. There must be more political thinking behind rather this than economic analysis of such key implications as the perverse effect higher steel prices will have on the automotive industry. Even with these protectionist measures, it might be difficult to save an already very ill, on the brink of bankruptcy, US steel industry.

Better than expected US numbers (ISM manufacturing and non manufacturing -former NAPM) helped the equity markets to stage a very nice rally and showing that more and more investors believe that recovery is under way. In Japan the punishment of four banks for not having respected the short selling rules, restrictions for short selling and government support for the stock market, have helped the Nikkei to establish itself well above the 10,000, level. It is very important to hold this level ahead of book closing end of March. Consolidation in a sideway market is now underway.

EUR/USD: Consolidation in a 0.8550 to 0.8750 range for the time being. Only a clear break of 0.8830 would change our still negative outlook and speak for a recovery up to 0.9030. We are carefully watching the extremely important support zone of around 0.8500. A weekly close below 0.8480 would be catastrophic and provoke the next down move, direction 0.8350.

USD/CHF: As long as the exchange rate stays above 1.6750/80, the dollar remains clearly in an up trend, with a key resistance level of 1.7250. Only a weekly close below 1.6750 would put the bullish outlook into doubt and suggest for a deeper correction, down to 1.6550 first.

USD/JPY: The yen remains in its range of 131.50 to 135.30 for the time being. We still favour a continual weakening of the yen, with our first target of 136.90 followed by 141.00 . A weekly close below 131.50 would speak for a move down, first to 130.00.

EUR/JPY: We keep half of our long EUR/JPY position at 114.30. S/L 112.80. Consolidation in 114 to 118 trading 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: Higher commodity prices are giving some support to the Aussie. Major support is at 0.5050. A weekly close above 0.5280 to 0.5330 would open the door for a higher Aussie, with next objective of 0.5450.

GBP/CHF: Extreme volatility at the moment with no clear trend. It remains in its wide range of 2.3850 to 2.4450. This range will remain unless the USD starts to trend lower.