What is the greatest temptation to governments trying to encourage economic progress? For those of us who believe in free markets, the answer is interference. All governments are guilty of it; it is just a matter of degree. Nevertheless, most would agree that the United States, notwithstanding the lobby system, is relatively close to being "hands off", while France, Germany and Japan are naturally dirigistes. One major economy stands out as having made the change towards letting free markets make the great majority of decisions: the United Kingdom. The change, in the 1980's under Thatcher, was extremely painful. Whole industries collapsed, unemployment rose, empty factories and offices were commonplace. Today the UK has low unemployment, a steadily expanding economy, a property boom (even a dangerous one) and high inward and outward investments. Now the question facing Europe is whether the eurozone Governments, led by Germany, are prepared to follow the same painful route to a more open economy.

There are signs that Germany is making the change, slowly, resentfully, painfully:

• The earlier rescue of Philip Holzmann was the "old" Germany, letting it fail this time, the "new"
• "Land"-sponsored lifelines for Fairchild Dornier are old
• letting Herlitz and Wunsche go is new
• forcing the hand of banks in Bavaria to extend loans to the Kirch Gruppe is old Germany, but the spectacular failure of the rescue is likely finally to convince German politicians that open markets are the better, even the only way.

The first successful attack on Fortress Germany was the Vodaphone acquisition of Mannesmann. Non-German ownership of German flagships is not exactly popular with the masses. Now it is Murdoch and Mediaset who epitomise German fears about foreign ownership. A partial rescue by foreign investors would in any case be better for Kirch stakeholders than simple collapse, but of greater long-term significance is whether a takeover from outside Germany will herald further unwinding of the political/lending/shareholding relationships of the old Germany and open up foreign capital inflows. Kirch could thus be a wake-up call to Germany as strong as Enron's was to the USA.

In the meantime, the losses from major German bankruptcies are falling on a number of (mainly) German banks. Early estimates are that Kirch Media has debts of EUR 1.4 billion to banks and KirchPayTV (the denouement of which is not yet complete) EUR 6.5 billion. BayernLB, with the largest losses in view from Kirch, is very sanguine about its exposure, but it might well be asked if being owned 50% by a German Land is itself a source of moral hazard. Lending decisions are made beyond consideration of commercial risk. Bond investors might be asking themselves whether such banks deserve their high credit ratings.

Any optimism we have about a change in Germany has to be tempered by caution because of another great difference between reformed Britain (along with Switzerland, by the way, a paragon of free market economies) and Germany and France: work. Undoubtedly Germany and France have quite high levels of productivity (per labour hour actually worked), but that advantage is lost with such poor employment performance: unemployment high, hours worked few and annual leave excessive.

Markets, currencies, interest rates; everything seems to be on hold this week. GDP recovery in the USA is not helping profits, Japan's currency and stock market look artificially supported, oil prices are undecided despite the Middle East horror story and Saddam's posturing. On the economic front, then, it is still "outlook mediocre, not too bad, not too good".

Where the situation does look nasty is investment banking. Partly this is due to exposure to corporate failures, but, in addition, there is the growing sense of distrust. A comparison of Merrill Lynch's public recommendations compared with privately expressed analyst opinion is more than a source of embarrassment (e.g. "short and long term buy" vs. "this stock is a powder keg" or other expressions we care not to print); it is a rich hunting ground for law suits, massive claims and, worst of all, loss of confidence. Perhaps it is all a good thing, if investors learn to make and trust their own judgements.

Recommended average maturity for bonds in each currency
Stay short.

The escalation in the Middle East has pushed the metals and petroleum prices to levels not seen for quite some time. The announcement by the BUBA that they intend to lower their gold holdings substantially blocked any follow through at gold's resistance at $ 308.--. This level would have to be broken to see new buying interest emerging. Iraq's decision to stop oil exports has not been followed by other oil producers, and $ 28.- is standing in the way of any further advances at present. Overall in the currency market, there is little new of significance, and consolidation in the well known trading bands is the most likely scenario for the foreseeable future.

EUR/USD: Only a weekly close above 0.8880 or below 0.8680 would bring some fresh air and cause the next move of at least 100 to 150 points.

USD/CHF: Despite the unhappiness of the SNB about the strong CHF and their action on short-term interest rates, the U.S. unit has a lot of difficulty in sustaining levels above 1.6800. On the downside, movements below 1.6500 are currently short-lived.

USD/JPY: As the U.S. unit failed to overcome resistance at Ґ 134.30, and no new capital flows out of Japan have been detected, the market's frustration brought about a new test of its critical support around 130.30. A clear break would bring the dollar quickly down to 129.50, followed by 128.80. We still believe in a lower JPY and would think that levels around 130.-and below represent good buying opportunities.

EUR/JPY: The major support zone around 114.50/80 needs to hold in order to see further JPY weakness, direction 115.80, 116.50 and 117.80.

USD/CAD: We keep 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: Support levels have gradually moved higher and the 0.5230/50 area looks quite solid for the moment. A weekly close above 0.5350 is needed to head in the direction 0.5450. Consolidation first.

GBP/CHF: As long as we stay above 2.3850, the GBP remains well supported and the next targets are 2.4000 followed by 2.4250. Any break below key support of 2.3850 would open the door again for 2.3550.