Bond Outlook
[by bridport & cie, September 12th 2001]
Beyond the grief, the sympathy of all of us with the Americans, and
the mourning, will be the recovery. Between now and then, however, lie
many months of lost consumer confidence, economic turndown and further
declines in stock markets. In a sense, this atrocity will accelerate what
was being played out in slow motion. For over a year now, we have
expressed the view that |
|
- the US economy can
properly recover only after rebalancing;
- that the US
authorities attempts to maintain consumer spending despite the
underlying lack of savings and the trade deficit are
inappropriate;
- even if stock
markets move up, the fundamentals (PEs and earnings growth) will mean an
unsustainable recovery.
|
|
Now, there is likely to be a sense of getting the worst over and
done with, the better placed to rebuild. |
|
The reaction of the Americans over the coming months will be
decisive as to the length of the downturn the world is now entering. If
they are so demoralised that they retreat into economic and political
isolationism, then the world will be in serious and long-term trouble. The
terrorists will have won not just a battle, but a war. While recognising
the risk of US isolationism, we firmly believe that the American fighting
spirit will assert itself, and that the Americans will be determined to
return to business as usual, not least to show that the terrorists cannot
defeat them. Likewise, the sense of shared outrage throughout the world
should increase the sense of solidarity against the common enemy. The
leaders of the sole superpower have enormous responsibilities, and this
tragedy can only encourage them to fulfil them still better. The world and
its financial markets are resilient, and will return to normality quite
quickly. |
|
For fixed-income investors, all our usual conservatism of
preferring sovereign and supranational bonds as the base of a portfolio is
reinforced, as is our belief that risk is better taken in emerging market
sovereign bonds than in corporates. As bond markets reopen, prices will,
of course, be higher. Investors are seeking safety rather than
yield. |
|
Let us venture a comment on the dollar. It was declining anyway. We
expect the euro to have a new lease of life, come January. Yesterday,
which included a knee-jerk reaction into the Swiss Franc and gold, looks
like accelerating the readjustment of the dollar that will let US industry
regain its competitiveness and reduce the trade deficit. Yet, the dollar
remains the preferred currency of trade and wealth accumulation. The
correction is unlikely to exceed a few more percentage points.
Paradoxically, the recovery has been brought closer, even if only because
the down trend will be shorter and sharper rather than long and drawn out
as it has been up to now. |
|
The sense
of "this makes everything move faster but in the same direction" applies
also to interest rates. All Central Banks are already providing massive
liquidity. Yield curves are moving lower over the entire range and
steepening. We have already recommended investors to move to longer
positions. They should remain long. |
|
Recommended average maturity for bonds in each currency
(changed 08 and 15.08). |
|
No change
to the long maturities we now
recommend. |
Currency: |
USD |
GBP |
EUR |
CHF |
As of
08.08.01 |
2006 |
2006 |
2007 |
2010 |
As of
15.08.01 |
2008 |
2006 |
2011 |
2010 |
|
|
With all US markets closed yesterday and today after the horrific
suicide attack by terrorists on US targets, all Central Banks world-wide
are on alert. After heavy plunges again on all equity markets, the BoJ was
the first CB to add extra liquidity into the system, warning that
speculative attacks would be punished by intervention, even on a concerted
basis. All CBs have made it very clear that they are going to add ample
liquidity into the banking system. Equity markets will remain under
pressure, and gradual shifts out of airlines-insurance and favouring
defence stocks are likely, as well as a flight to quality, i.e. into cash,
and government bonds, more in CHF and EUR then in USD. |
|
There is no change as regards Japan: more and more capital flows
are being detected being repatriated in the context of book closing at the
end of September, and also covering losses on the Nikkei. Repeated verbal
intervention by monetary officials to weaken the JPY remains ineffective
for the moment. Only a rapid move below USD/JPY 118.00 might provoke the
BoJ to step into the market. |
|
EUR/USD: The 0.9000 remains the mid
point for the time being. We expect the 0.8850-0.8900 area as very
supportive and the euro should have the ability to seriously test the
upside of the recent trading range at 0.9230/50, which needs to be broken
on a weekly basis to make further progress. We rather opt for continuous
range trading for the time being. |
|
USD/CHF: 1.6800/1.6850 caps
upside attempts for the time being, whereas 1.6400/30 remains very solid
support. Only a loss of 1.6350 due to continued capital inflow might
provoke an additional sell off down to 1.6150. |
|
USD/JPY: Same comment: the verbal
interventions by the Japanese have put a floor around 119.00 but sooner or
later capital flows might provoke a test of the BoJ. Any loss of the
support area at 118.00 should provoke a rapid move direction 115.00.
USD/JPY 121.30 still acts as a major break out level on the topside with
first target of 123. |
|
EUR/JPY: Due to continued capital
repatriation, this cross should remain in a large consolidation range of
105.50 to 111.--. A lasting strength of the JPY with levels below 106.-
will provoke the BoJ, whereas levels above 110.- are still being used by
Japanese exporters to sell the EUR/JPY. |
|
USD/CAD: Any excessive weakness above
1.57 should be used to buy CAD for medium term purposes despite an old
rule which says what is bad for the US is even worse for CAD. Monetary
policy in Canada should give some support to the
currency. |
|
AUD/USD: Aussie should stay above its
major support of 0.5050, as fear of RBA stepping into the market is real.
Most likely range short term should be 0.5110 to 0.5290. Only a clear
break above 0.5330 would open the door for 0.5410. |
|
GBP/CHF: This cross will remain
extremely volatile over the next couple of weeks. Higher oil prices and
GBP as an alternative currency are giving some support to sterling,
whereas safe haven buying of CHF in an uncertain market environment is
favouring the Swiss Franc. 2.4700 to 2.4900 is a big resistance zone,
which should hold. A downside break of 2.4100 should again open the door
for 2.3850. |
|
USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.6850 |
0.9250 |
1.5250 |
121.30 |
11050 |
Current spot
level |
1.6599 |
0.9070 |
1.5035 |
119.45 |
108.35 |
Support/Breakout |
1.6450 |
0.8880 |
1.4950 |
118.00 |
105.50 |
|
AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.5280 |
0.4450 |
1.5680 |
1.4730 |
285.00 |
Current spot
level |
0.5140 |
0.4280 |
1.5630 |
1.4630 |
280.80 |
Support/Breakout |
0.5050 |
0.4150 |
1.5350 |
1.4450 |
275.00 |
|