Bond Outlook
[by bridport & cie, July 10th 2002]
Is this systemic failure, a reflection of such widespread
disenchantment with financial markets, corporate leaders, investment
advisers and accountants, that even good news is totally discounted? Some
extremists have come to that belief, announcing, for example, their
complete withdrawal from equities and switching into very long-maturity
Swiss Confederation bonds. They are basically taking the views we have
expressed for about two years, but raised them by an order of magnitude.
We are not that pessimistic, although we do come to the same basic,
defensive conclusion. Seeking returns must give way to asset protection,
the dollar has entered a prolonged phase of weakness, and long maturities
in Government bonds is the place to be. In fact, we recommend further
lengthening over the seven years we suggested a month ago. Ten years looks
appropriate for all currencies except Sterling (two reasons to stay at
five years: the shape of the curve reflecting a shortage of long-term
Gilts, and the possibility of a rate rise to tame the runaway housing
market). |
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We rather see the current period of doubt as systemic
weakness rather than failure, retaining a certain faith that market
and democratic forces will eventually bring about the corrections needed.
However, that requires time measured in years, just as rebalancing both
the US and the world's economies will require years. |
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The days when the "Rest of the World" looked to the USA for
leadership in all things political and economic have gone.
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- Where is the
credibility of an Administration that preaches free trade but sets up
huge farming subsidies and steel tariffs, and speaks of international
collaboration and justice while spurning the international consensus on
the environment and on war crimes?…. Guantanamo Bay….?
- How can US
accountants and financial regulators be taken seriously after the
Andersen scandals and, worse, the resistance of the accounting
profession to a principles-based approach over a rules-based system?
- What trust can be
given to corporate leaders that so obviously put their personal avarice
above all else?
- What hope can there
be for system reforms under a President tainted by issues of insider
trading and a Vice President associated with accounting fraud at
Halliburton? These stories look set to run.
- How fast can the US
economy find a new balance when the Administration does not even
recognise the imbalances and thinks that low interest rates are all that
is needed to turn an ailing economy around?
- How much power does
the Fed really have over interest rates when so much credit creation is
in private hands (banks' securitisation of debt) and semi-private (the
mortgage agencies)?
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These are indeed serious questions, making the above, extreme views
about systemic failure at least understandable. If the world's "natural"
leader proves wanting, it is up to others to take on the responsibilities.
Digby Jones (Confederation of British Industry) has asked Japan to join
the UK in "standing up to a failure of US leadership in the conduct of
global business". What a pity he could not have made that plea to other
countries in the European Union. For the moment the UK looks clean of
accounting scandals. It appears that US companies wanting to reassure
investors of their propriety are appointing UK-trained financial
directors, just like the new Chairman of the Financial Accounting
Standards Board, Robert Herz, who has an accounting degree from Manchester
University). Long may the UK's accounting reputation last, for everyone's
good! |
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Everyone talks about the reluctant moves in France and Germany to
the "Anglo-American" business approach. The shortcomings of the "American"
part are now glaring. Vivendi represented an example of espousing the
approach, warts and all. At the other extreme, the reluctance of the
German Government to let the market have its ways with Kirch, Holzmann
and, now, Babcock, witnesses to the death throes of "Deutschland AG". If
only Chirac has the courage he needs in France, and Stoiber is similarly
brave when he takes over in Germany, then the European Union could at last
pick up America's dropped mantle. |
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In Europe, the build up in euro cash as the dollar weakens will in
the short term reinforce deflation (hence delays in raising interest rates
and our lengthening); in the long run that money will seek a more
lucrative home. |
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Systemic weakness is showing up in the bond market, too. Selling
certain corporate and emerging-market bonds is proving more and more
difficult, with some market makers calling a temporary halt.
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The least gloomy spot in the world at present seems to be non-Japan
Asia for both GDP growth and stock market opportunity. For fixed-income,
however, countries like Korea and China just do not offer enough
liquidity. So, for yield with measured risk, we are left only with Russia
and Mexico, countries likely to be upgraded soon. |
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Recommended average maturity for bonds in each
currency Lengthen still further, except in
Sterling. |
Currency: |
USD |
GBP |
EUR |
CHF |
As of
12.06.02 |
2009 |
2007 |
2009 |
2009 |
As of
10.07.02 |
2012 |
2007 |
2012 |
2012 |
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Once again, after a short respite, a fresh accounting scandal
(Merck's inflated revenues) has spurred a new wave of dollar selling. Mr.
Bush's speech announcing stricter controls and more power to the SEC
impressed nobody, not least because both the President and his Vice
President have previously also been involved in insider trading or
accounting fudges. As already stated, more and more investors are
continuing to clean out their portfolios and flee into quality bonds or
cash. In Japan, contradictory statements by Shiokawa (Mr. MoF himself) put
into question the recent interventions by the BoJ. Our view is that the
USD/JPY in the 115.00 to 117.00 area represents a USD buying opportunity
for medium term purposes. |
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EUR/USD: A short test of 0.9730 has
been seen, then back up again to test 0.9970. A clear break of 1.0030
would stimulate fresh EUR buying and bring the exchange rate quickly to
1.0250. Nevertheless, our expectation is for some consolidation in a broad
0.9650 to 1.0100 range for the time being. |
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USD/CHF: Same comment: in this
uncertain market environment, the CHF remains king. Consolidation has been
underway below 1.5000 with strong support coming in at 1.4780. The
downtrend remains clearly intact, but a break of 1.50 could trigger some
stop losses and open the door for 1.5150, 1.5300. Supports are at 1.4730,
1.4650 and 1.4550. |
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USD/JPY: The consolidation range
USD/JPY 118/121.- has worked well so far, but with recent comments and the
still very bearish sentiment towards the US, the support area at 117.80 is
being challenged again. A weekly close below it would still be very USD
negative and open the door for 115.50. We still believe that the Japanese
cannot afford sustained JPY strength and therefore advise customers to buy
USD in a 115.00 to 117.00 range. |
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EUR/JPY: The key support at 117.80 has
been broken, but not on a weekly basis. So long as the rate stays below
this level, the next important target is still 115.50. On the upside,
118.50 and 119.30 remain tough resistance levels. A very broad
consolidation range of 114.50 to 119.50 is the most likely
outcome. |
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USD/CAD: All commodity currencies continue to
be well supported and, in light of bad news out of the USA, investors
continue to look for alternatives. A weekly close below 1.5130 would open
the door for 1.5050, 1.4980, and then 1.4850. Upside is 1.5250 and
1.5330. |
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AUD/USD: Consolidation in a 0.5500 to
0.5750 range expected. |
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GBP/CHF: The bottom of GBP/CHF has
moved gradually higher and 2.2850 is acting as strong support now. A clear
move above 2.3130 would send this cross in the direction of 2.3300.
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USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.4980 |
0.9980 |
1.4780 |
120.50 |
117.80 |
Current spot
level |
1.4835 |
0.9930 |
1.4735 |
117.80 |
116.90 |
Support/Breakout |
1.4780 |
0.9850 |
1.4650 |
117.30 |
116.40 |
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AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.5750 |
0.4950 |
1.5280 |
1.5650 |
318.50 |
Current spot
level |
0.5700 |
0.4920 |
1.5150 |
1.5500 |
315.80 |
Support/Breakout |
0.5630 |
0.4840 |
1.5050 |
1.5430 |
308.00 |
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