Bond Outlook
[by bridport & cie, May 15th 2002]
This has been a week in which the policy of the US Government to
keep the consumer spending has borne the fruit of both increased consumer
spending and renewed stock market bullishness. Just as we thought the
pigeons (of which we spoke last week) were landing as they came home to
roost, they have suddenly been chased away again. The current account
deficit, very high PEs, an over-valued dollar, the growing internal budget
deficit, spare industrial production capacity, loss of corporate pricing
power, uncertainties over pension funds, are all "pigeons" flying around,
but which have to land one day. Last week the market's expectation was
that the Fed would not dare raise rates until late in the year; this week
August has now been earmarked for a first move upward. Overall, we remain
very cautious about the recovery: we see the fundamentals as so anaemic
that the Fed cannot move its rate up without undermining GDP expansion. We
therefore believe our call to bar-bell in dollars and euros was basically
correct, if a little early. |
|
The strength of the dollar is both a problem and a possible
solution. If the dollar continues to fall, some of the imbalances of the
US economy and the world's could be reduced. If it stays high, continued
denial will still rule. It is rather like the world being on an enjoyable
drug trip. It is easier to sell goods to the USA than it is to develop
one's own domestic economy. Never mind that the USA, a notorious debtor
(by far the world's biggest), is forever increasing its indebtedness. The
worst offender for US-dependency is, of course, Japan. Every time the USA
(and, in fairness, some Asian countries) start sucking in additional
imports from Japan, the Japanese trade surplus balloons, the yen
strengthens and the very need for reform weakens (we were tempted to write
"the urgency for reform dissipates", but the concept of urgency seems
unheard of in Japanese political circles). Japan will not let its pigeons
home to roost either! |
|
Euroland continues to suffer from its self-imposed straitjackets of
a 2% inflation ceiling and the Stability Pact (we see the former as the
more negative). The ECB frets about having to raise interest rates, just
when the economy can least afford it. France makes noises about reducing
taxation to boost the economy, but Germany promptly says, "You can't do
that!" It really is not very edifying. If the high-taxation parties stay
in power this year in the largest Euroland economies, the opportunity to
"set the market free" will again have been missed. |
|
We see a grain of optimism, even though based on an unexpected
phenomenon. The Dutch elections, with their protest vote and move to the
right, represent a serious warning to politicians that they must listen to
the people's concerns. In addition, the Dutch are turning away from their
traditional social-market economics. In both regards, their traditional
trailblazing role for Europe is one we see as positive for us all.
|
|
The euphoria created by this week's US consumer spending takes
people's minds off other vital issues like those concerning financial
reporting. It does not help the overall image of financial reporting that,
faced with Congress refusing to lift the borrowing limits of the US
Government, the Bush/O'Neill team simply go into dodgy inter-account
borrowing to be able to keep spending. This, while the Andersen trial and
bank inquiries quietly continue. The latest ramblings of the International
Accounting Standards Board look awfully like a weakening of position.
However, the IASB are at least claiming that they are sticking to the
primacy of principles over prescriptive rules (GAAP stand accused of the
opposite). |
|
Recently we have expressed concerns about the overvaluation of
emerging market sovereign bonds. A degree of contagion is spreading as
Argentina's economy worsens. Uruguay has seen further downgrading and
spreads have widened, especially on Brazil, where there is much
nervousness on the standing in the opinion polls of Luiz Inacio Lula da
Silva, the populist candidate of the Workers' Party (PT). In fact, only
Russia seems currently insulated against spreading doubts on emerging
markets. There will come a time when emerging market sovereign bonds are
oversold, but currently we would see them as still
overbought. |
|
Recommended average maturity for bonds in each
currency Bar-bell in dollars and euros, lengthen in Swiss Francs,
but no change yet in Sterling. |
Currency: |
USD |
GBP |
EUR |
CHF |
As of
01.05.02 |
2007
bar-bell |
2005 |
2007
bar-bell |
2007 |
|
|
The negative sentiment towards the US unit remains and the extreme
volatility in the US equity markets does not help inspire confidence.
Market participants are starting to be underweight in US stocks, and major
banks worldwide have begun to change their FX-forecasts, looking for a
higher euro. However, the fact is that economic recovery in the USA is
under way, and their "mixed" numbers are far above anything in the EU.
France wants to cut taxes, Germany is still affected by strikes and the EU
commission urges budget prudence, eyeing Portugal, Italy, Germany and
France.
As we stated last week, consolidation is likely first before
further euro gains might be seen. |
|
EUR/USD: It looks that the rally in
the euro is running out of steam. A break of 0.9180 to test 0.9250 is
needed, followed by 0.9340. Any loss of 0.8990 would be catastrophic and
open the door for 0.8930, 0.8880 and 0.8840. |
|
USD/CHF: Once again, movements
below 1.6000 remained short lived and the strong CHF could not achieve any
additional gains, testing 1.5880 only once. Our first target of 1.6150 has
been achieved, and 1.6250 and 1.6330 are next. Only a break of 1.5780
would put that scenario into doubt and lead to a direct target of
1.5650. |
|
USD/JPY: We still see continued
consolidation in a range of 126.50 to 130.00. Japan is again achieving
very impressive surpluses with its export industry thriving (nothing has
changed domestically). Exporters are continuing to sell USD in the upper
129.00ish levels, capping the dollar below 130. |
|
EUR/JPY: Same comment: the major
support zone remains around 114.50/80 and is holding for the time being.
The upside is capped by 116.50, 117.20 and 117.80. Any sustained break of
114.50 would see this cross immediately down to 113.00. |
|
USD/CAD: Some
consolidation is likely in a 1.5550 to 1.5780 range. We might reconsider
re-establishing again a short USD/CAD position in the high
1.5700s. |
|
AUD/USD: The rally in the Aussie has
continued and even took out our resistance level at 0.5450, to test a high
of nearly 0.5500. Despite our remaining positive on the Aussie and looking
for higher levels medium term (0.5650), we still expect some consolidation
first and think that there will be a better buying opportunity around the
0.5350 area. |
|
GBP/CHF: Sterling continues to be
under pressure, and 2.3550 is acting now as a very strong resistance.
Downside targets are 2.3250, 2.3160 and 2.3000. Consolidation is likely
here first, as well |
|
|
USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.6250 |
0.9180 |
1.4590 |
129.10 |
116.10 |
Current spot
level |
1.6110 |
0.9030 |
1.4550 |
128.10 |
115.60 |
Support/Breakout |
1.5980 |
0.8980 |
1.4520 |
127.50 |
115.20 |
|
AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.5510 |
0.4580 |
1.5650 |
1.4630 |
312.00 |
Current spot
level |
0.5450 |
0.4560 |
1.5590 |
1.4480 |
307.50 |
Support/Breakout |
0.5380 |
0.4480 |
1.5530 |
1.4450 |
303.00 |
|
|