Bond
Outlook [by bridport
& cie, June 11th 2003]
Echoes of the start of 2000: PEs at much the same levels as then
(22 on the DJIA, 35 on the S&P500), continual rises in the stock
markets despite unremitting poor data on unemployment, factory orders,
wholesale sales and manufacturing activity. Business Week, which
momentarily joined the bears as the Iraq war broke out, has returned to
spinning good news out of nearly nothing. Their argument this week is that
spare manufacturing capacity has declined, so business investment must
pick up. Bad news such as IBM and Freddie Mac engaging in misleading
reporting, or Motorola having problems in its semi-conductor business,
seems to have only a one-day effect on the stock markets, which
immediately return to their expansion. As for the fundamental data on
economic activity, no one is interested in them. |
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This looks like a mini-bubble, but there are, of course,
differences with 1999/2000. Then, investors were taken in by the concept
that the basic rules of economics had changed. Now, it seems to be a case
of so much money looking for a home that much of it moves to stocks
"regardless". Stocks look attractive partly because returns on anything
else are so low, and partly because of nothing more than the crowd effect.
Technical analysis pointed to this rally, and its prophecy has been duly
(self) fulfilled - so far. |
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The behaviour of interest rates now and then contrasts also. In the
end 90s bubble, interest rates were rising as the Fed made a feeble
attempt to counter "irrational exuberance", but it was as if the mere fact
of the Fed raising them proved that the economy was powering ahead. The
bubble burst and the argument was reversed. "Interest rates are going
down, so the economy will turn round and stocks take off again." Three
years after that new tack, interest rates are still declining and expected
to continue downwards. It is a source of continual amazement to us that an
approach proven over three years to work so ineffectually for the
underlying economy is still the central pillar of the US Administration's
economic policy. |
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There are two possible outcomes to the policy of ever cheaper money
(plus lower taxation). Either "traction" will be achieved (odd how that
word was used so much two years ago), or deflation will settle in. Despite
our general scepticism over US economic policy, we do not expect the USA
to follow Japan and Germany into multiple year deflationary stagnation.
That is because the blatant weakness of the US economy (everybody living
beyond their means) can, in time, be corrected by the weaker dollar. It
appears that US officials are very divided on this issue, but it does not
really matter, as the market does its work despite their doubts. It will
take two or three years to work through the process of import substitution
to increased exports, but the end result will be a healthier US and world
economy. |
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One good thing about Europe is that there is no Administration
issuing rose-coloured spectacles to everyone. The economic situation is
bad, and no one is hiding that fact. The ECB has to focus on Germany's
plight rather than the lesser problems of inflation in Ireland and
Portugal. The 3% limit on deficit spending has to be lifted. Pension
reforms are inevitable, and the sooner they come the less the pain. We
would not go so far as saying the euro zone's problems are pulling it
apart, but they do make the euro look ever less attractive to the UK,
which is doing "least badly" in these difficult days. |
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Back on January 15 and again on February 19, we warned readers of
the danger of the Norwegian Crown weakening. It has since weakened much
further, and technical analysis now suggests a danger point.
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We remain optimistic about Russia, and its bonds have performed
very well. Its economy is very attractive, but there remains a political
risk (of an "oligarch", rather than a communist, take over), and returns
on bonds are much lower than even a few months back. Limited profit taking
looks appropriate. |
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The Blair/Brown policy on the euro is modelled on Greenspan's
pronouncements. You can always find what you are looking for! Five
economic tests and 2000+ pages of analysis leave plenty of room for
interpretation. Had Brown wanted to, he could have made a case for joining
from exactly the same data. However, public opinion and the power of the
Sun (the largest UK mass circulation newspaper, fervently anti-European in
all things) are formidable barriers, for which subtleties about increasing
exports to Europe and increased inward investment will cut no ice. The Sun
has but to point to Germany and France. |
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Recommended average maturity for bonds in each currency
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Stay long in dollars and euros, yields have to decline further.
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Currency: |
USD
|
GBP
|
EUR
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CHF
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As of
07.05.03 |
2013
|
2008
|
2013
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2008
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The market is continuing to consolidate and is digesting the recent
interest rate cuts. The ECB has left the door open for further easing
after its cut of last week. The majority of primary dealers in the USA are
looking for another easing by the FED, of at least 0.25, or even 0.50%, on
the 25 June. Equity markets still look well supported and US economic
numbers, especially "expectations", are also improving but are still
considered unconvincing. The management overhaul at Freddie Mac and the
possible accounting problems need to be watched carefully. Strikes in
France, pension fund problems in Germany and the terrible state of the
majority of the European economies are being completely ignored by the
forex markets. |
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EUR/USD: 1.1550/80 is acting as major
support now. 1.1620/50 is already attracting some buyers, with upside
resistance at 1.1780 and 1.1850 |
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USD/CHF: 1.3070 is providing major
support for the time being, with the CHF still losing ground against many
currencies. A break would open the door for 1.2970. The upside is 1.3170,
followed by 1.3280 and 1.3450 |
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USD/JPY: The BoJ continues to prove
itself adept at defending the USD/JPY 115.00 zone. 117.50/80 is still
acting as a major support zone, while 118.90/119.10 looks rather heavy at
present. Only a clear break above 120.30 would trigger an additional move,
direction 121.50 |
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EUR/JPY: The air is getting thin around
140.00. Support is at 137.70 and 136.80, followed by 135.50. 138.80 is
providing upside resistance |
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GBP/USD: 1.6230/80 remains a very strong
support. The upside is 1.6550 1.6630 followed by 1.6750. |
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USD/CAD: We keep our long CAD position
established at 1.3905 with a stop profit at 1.3800. Support is at 1.3550,
1.3480 and 1.3400. Resistance at 1.3680, 1.3750 |
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AUD/USD: The support has gradually moved
higher from 0.6350 up to 0.6480. Topside resistance is at 0.6610, 0.6680
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USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.3180
|
1.1780
|
1.5410
|
118.30
|
138.80
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Current
spot level |
1.3130
|
1.1700
|
1.5370
|
117.80
|
137.65
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Support/Breakout |
1.3070
|
1.1650
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1.5310
|
117.30
|
136.80
|
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AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.6610
|
0.5820
|
1.3780
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1.6630
|
358.00
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Current
spot level |
0.6570
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0.5740
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1.3630
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1.6520
|
352.50
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Support/Breakout |
0.6480
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0.5650
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1.3480
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1.6480
|
340.00
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