Bond
Outlook [by bridport
& cie, February 12th 2003]
Over the years, our Weekly has become ever more critical of US
economic policy. We sometimes feel like a voice crying in the wilderness.
It is, frankly, difficult to hold a view contrary to so many advisers
making presentations here in the world's centre for private banking. At a
personal level, therefore, there came a sense of relief when 400 leading
US economists also called the Bush tax cut "fiscally irresponsible", and
then Greenspan last night publicly opposed fiscal deficits, fearing
ineffective short-term benefits and long-term damage. He blames the
geo-political situation for making things worse than they would otherwise
be, while sounding a note of caution and uncertainty about what lies under
the fog of war. |
|
We find ourselves less uncertain about what lies under the fog in
the US economy: a mess of deficits and indebtedness condemning the country
to a poor performance for many years to come. Our view since early 2000:
without rebalancing of deficits, there can be little sustainable growth
and only poor returns on investment. The only good thing to point to about
the US economy is a weaker dollar. It will eventually help adjust the
external deficit and wean the world of dollarcentricity, but this is
despite of, not because of the Administration's policy. |
|
The common belief of investment advisers is that the USA will lead
the world out of recession and that only the USA can do so. If that is
true, then the world is indeed in big trouble. Japan is no candidate for
leadership, since the country has never learned to import. Non-Japan Asia
is likewise not ready to provide markets and is now the new source of
manufacturing competition to the West (and even some service competition).
The "commodity-currency" countries are just not big enough.
|
|
So what about Europe? The German giant at its centre is on its
knees, and the countries soon to join are not exactly models of
efficiency. The UK is significantly more pro-market, but is in danger from
its housing bubble. We see the Continent as fundamentally held back by
French and German policies, and by an ECB still fighting a war on
inflation. Despite all that, the euro zone has room for lower rates, and
increased domestic consumption. There is acute awareness in France and
Germany of the need to reform labour laws and the social/pension system.
Still, it takes optimism to suppose that their respective governments will
be prepared to take on the entrenched union opposition to the reforms, as
the Italians have. |
|
Whether our restrained Euro-optimism is justified or not, nothing
is going to happen very fast. Yes, there will be some market moves as and
when war is started, but the underlying economic situation does not lend
itself to quick fixes. Two massive and opposing forces are now present
everywhere; |
|
- Deflationary
forces, like spare production capacity and reduced pricing power for
manufacturers, increasing unemployment and resulting labour cost
moderation, non-Japan Asia as a source of foreign pricing competition,
and, but for Europe only, an appreciating currency.
- Inflationary
forces, like more expensive oil and other commodities, the housing
bubble, deficit spending and, for the USA, a depreciating
currency.
|
|
The strength of the deflationary forces is apparent from the very
fact that cheap money in the USA is doing so little to turn the economy
round (the parallel with Japan is striking). However, the risk of
inflation is detectable both in commodity prices and in the performance of
"TIPS" (index-linked Treasuries). |
|
Which of these two forces will overcome the other is impossible to
forecast, but we can say that the odds are more in favour of inflation in
the USA than in Europe, even in the UK. We therefore hold our "long
maturity" recommendation for bonds in euros (as cuts by the ECB are still
in the pipeline). For the USA, however, our clients prefer short
maturities, although we are loath to shorten further yet. For Sterling and
the Swiss Franc, there is no strong argument one way or the other.
|
|
The search for yield is still pushing investors towards corporates,
with all the dangers that entails without good credit intelligence. Our
long-held preference for yield via Russia sovereign and oil company bonds
has been given a powerful benediction by BP's multi-billion commitment to
that country. |
|
Recommended average maturity for bonds in each currency
|
|
We maintain our recommendation for maturities in euro to average
ten years. |
Currency: |
USD
|
GBP
|
EUR
|
CHF
|
As of
22.01.03 |
2008
|
2008
|
2013
|
2008
|
|
|
The pressure on Iraq is gradually but surely increasing. With the
split inside NATO, and France, Germany, Russia and China still insisting
on a continuation of the inspections, all eyes are on Mr. Blix's report on
Friday. As Ramadan finishes on Saturday and Bin Laden is promising to
punish all countries helping the USA to combat Iraq, alerts for terrorist
attacks are again at a very high level. |
|
On the economic front, France, Germany and the UK are already in
talks about softening the Maastricht criteria, with France having one of
the worst industrial outputs over the last five years and Germany
reporting very bad unemployment data. In the USA, deficits are on a
continuous rising path. It remains to be seen how the inflation numbers
are coming out this month with a still rising oil price. Most probable
outcome: consolidation in a sideways market. |
|
EUR/USD: The market is still in a
correction mode, and 1.0950 is so far capping the euro below the 1.1000
barrier. The 1.0650 support zone is attracting some buying interest.
Consolidation in this range is expected and only a weekly break of either
levels would bring about the next movement of 100 to 150 points.
|
|
USD/CHF: Consolidation in a 1.3450 to
1.3750 range is expected. A weekly close outside this range would be
needed to start the next movement of at least 150 points.
|
|
USD/JPY: With the hidden intervention
policy by the BoJ, the USD/JPY managed to establish itself above 120.--.
There is strong support at 119.50, and the breakout level on the upside is
at 121.70. |
|
EUR/JPY: Extreme volatility continues in
this cross. The trend remains up, but 130.50 is capping any further
movement higher. Downside support comes in at 129.30 and strong support at
128.80. |
|
USD/CAD: Same comment: CAD continues its
appreciation and was able to test levels slightly around 1.5100 so far. A
weekly close below 1.5050 is needed for a medium-term trend change to
materialise, with a price objective of 1.4200. The time may not yet be
ripe. Upside resistance is at 1.5280, 1.5350 and 1.5410 |
|
AUD/USD: Same comment: key support is
now coming in at 0.5780. The trend remains clearly oriented to the upside
with 0.5930, 0.5980 and 0.6050 as the next price objectives
|
|
|
USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.3750
|
1.0820
|
1.4720
|
121.50
|
130.30
|
Current
spot level |
1.3640
|
1.0760
|
1.4670
|
120.65
|
129.75
|
Support/Breakout |
1.3450
|
1.0650
|
1.4630
|
120.10
|
129.30
|
|
AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.6010
|
0.5530
|
1.5310
|
1.6350
|
371.00
|
Current
spot level |
0.5980
|
0.5515
|
1.5280
|
1.6180
|
363.00
|
Support/Breakout |
0.5850
|
0.5450
|
1.5150
|
1.6150
|
355.00
|
|
|