Bond Outlook
[by bridport & cie, January 9th 2002]
Some quite remarkable events have taken place since our last
bulletin: |
|
- The Argentinean
collapse and default,
- The euro entering
circulation
- The yen
falling,
|
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The ring fencing of Argentina has so far proven to be even more
solid than we thought. However, the Argentine story is far from over.
President Duhalde is a populist unlikely to pursue economic rigueur, and
who may well open the door to massive inflation, economic isolation and
collapse and, very possibly, to insurrection and military government.
Emerging markets will be well tested by post-default Argentina, yet we
remain relatively optimistic about them overall, and especially about
Russia. |
|
The euro is off and running. It is not without threats, like
Italy's cheating on the EMU rules and fears that Southern European
countries may suffer from having their currency out of their own control.
Nonetheless, the advantages of a single currency should gradually unfold,
and international demand for the euro (Asian Government reserves and grey
market operators in Eastern Europe) should give it
strength. |
|
Commentators on Japan are still expressing doubts that even yen
devaluation will be enough to turn the economy round. Our view is that yen
devaluation should not be seen as a route to "exporting Japan's way out of
recession", but as a means of introducing inflation. We have argued for
more than two years that only inflation can persuade the Japanese to
increase domestic spending, the only lasting route to expansion in an
economy already heavily export-orientated. A declining yen is bound to
have repercussions for other Asian currencies, not least the Hong Kong
dollar, which might find its peg to the US dollar rather heavy to
bear. |
|
Over the last few months, our views about the fundamentals of the
US economy have been much less optimistic than those either of the
financial markets or of most commentators. We do see a recovery, but only
at the end of 2002. This view is gaining favour, but with a variant built
round a "double-dip" recession. It may not be too long before we are
accused of over-optimism! However, for the moment our expectations on
interest rates remain as they have been for some months: every chance of a
further cut in the USA, one or two cuts still to come in Europe, and then
holding steady till year's end. If the economy does begin expanding in the
USA at the end of the year (our current scenario), the long end of the
yield curve will move up, much as it did at the end of 2001. That supposes
of course that the recovery we foresee at the end of 2002 has a firmer
foundation than the one financial markets perceived at the end of 2001 and
to which they are still clinging. |
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The consequences of the overpriced, share-based acquisitions of
hi-tech companies in the late 1990s are only now coming home to roost. A
relatively new US accounting rule means that companies may no longer
dribble away goodwill over forty years. Now they must write down goodwill
if its original justification, viz., that profits from an acquisition
justify a price in excess of book value, are proving unfounded. Such was
the case with last year's JDS Uniphase $50 billion write-off, but at least
that company had the merit of facing up to the problem early. Such will be
the case with AOL Time Warner, Viacom, AT&T and Qwest and a host of
others in the coming months. The amounts due for write-off are much
greater than the profitability of all companies in the S&P 500 index
put together (in the order of several hundred billion dollars vs. annual
earnings expectations of some $400 billion per annum). The write-offs will
have an interesting impact on stock valuations! |
|
The United Kingdom continues to astonish. While manufacturing
hurts, consumers just will not slow spending. The BoE is making noises
about needing to raise interest rates, despite the howls of protest that
will cause from industry. |
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With the passage of the year, our recommendations on average
maturities now look quite short (four years). We have been on the qui
vive for further shortening in the event of the US achieving traction
and the Fed raising rates. It looks like we may relax over that
eventuality. |
|
Recommended average maturity for bonds in each
currency We leave our recommended average maturities at a little
over four years. |
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 |
|
|
The major topic over the last three weeks has been yen weakness.
Since the intervention by the BoJ in October, which showed their
determination to weaken their currency, the yen has lost approximately
10%. So far. no opposition to this move has been heard from US officials
or their Japanese counterparts. Thus. the trend for a weaker yen is well
in place, even though a technical correction could occur at anytime.
Moreover, countries like China, Korea and Taiwan, as well as US
manufacturers, might show their discontent with the weaker
yen. |
|
EUR/USD: Trading range of 0.8850 to
0.9050. A break of the support at 0.8810 or of resistance at 0.9080 could
provoke the next movement of 100 to 150 points. |
|
USD/CHF: consolidation in a 1.64
to 1.66 range. Breakout level is 1.6780 on the topside and 1.6250 on the
downside |
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USD/JPY: The weakness of the YEN is
continuing with our next target at 136.90. A major technical correction
could occur anytime with supports coming in at 130.40, followed by
129.10. |
|
EUR/JPY: Trading in a 116.50 to 119.50
range with some buying interest below 116.00 and strong profit taking in
the upper 119s. |
|
USD/CAD: Here again, the renewed
weakness of the CAD should be used to establish a short USD/CAD position
at 1.5955, with a price objective of 1.5650 and a stop loss at
1.6280. |
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AUD/USD: The Aussie has built a solid
base above 0.5000, but needs to break 0.5280 on a weekly basis to make
further progress, direction 0.5400. |
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GBP/CHF: Extreme volatility will remain
in this cross and only a clear break of the resistance at 2.3850 would
open the door for its next target at 2.4100. Major support comes in
2.3550, followed by 2.3300. |
|
|
USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.6630 |
0.9030 |
1.4880 |
134.30 |
120.20 |
Current spot
level |
1.6580 |
0.8925 |
1.4790 |
132.30 |
118.10 |
Support/Breakout |
1.6380 |
0.8880 |
1.4650 |
130.40 |
116.50 |
|
AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.5310 |
0.4350 |
1.6030 |
1.4610 |
283.00 |
Current spot
level |
0.5230 |
0.4290 |
1.5950 |
1.4400 |
279.50 |
Support/Breakout |
0.5050 |
0.4180 |
1.5780 |
1.4330 |
274.50 |
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