Last week, we said that a rise in interest rates looked very unlikely until much later in the year, and that it was time to lengthen average maturities and undo bar-bells. The ECB promptly came out with a warning about inflation and a possible rise in interest rates, causing us, it must be said, some concern. Now, only a week later, inflation in Europe and the UK is indeed coming in at lower levels, while the weakness of the US recovery is ever more widely recognised. Our recommendation on maturities was therefore timely and appropriate.

How can investors achieve decent returns when:

1. Stock markets are bearish but prices still historically much too high.
2. Corporate bonds have sprung too many nasty surprises for comfort.
3. Most emerging markets sovereigns no longer offer a high enough return for their risk
4. Cash is very poorly remunerated.
5. Reliance on the USA to lead world economic expansion looks increasingly unrealistic.
6. Distrust of the corporate and financial world is so high?

A possible answer is "search for nuggets in the corporate bond world", but that answer can apply only to investors well equipped with analytical skills for credit risk, meaning first-hand capability to tear apart companies' balance sheets and to assess their business outlook. Such skills are rare, which may give an opportunity to many much-maligned stock analysts to redirect their efforts. They should be warned, however, that some new skills might be required. "Momentum investing" definitely does not apply to bonds! Understanding the basics of generating real profit and positive cash flow does!

A broader answer might lie in sovereign bonds in a few emerging markets, but more than usual caution is required there today. We repeat our warnings about Latin America, especially Brazil, all the more so since Latin American economies are even more dependent on the USA than the rest of the world is. A propos of Brazil, rescheduling looks a strong possibility, and we wonder if IMF loans are not themselves the kiss of death, mere palliatives putting off the inevitable! Elsewhere, Turkey is going through another political and economic storm, and many former Eastern Bloc countries' bonds seem very expensive. If pushed, we would say that Russia and Korea look attractive. Some would add Mexico, but for us, the spread is too small for the risk.

Surveys of equity investors suggest a movement to under-weighting the USA, a reduction of under-weighting for Japan, with over-weighting for Europe and Asia. This, however, tells us more about the outlook for the dollar than it does about bond markets.

As we have often said over two years now, this decade is one in which protection should predominate and expectations for returns must be adjusted downwards. Until the world weans itself off dependency on the over-indebted American economy, that rather gloomy conclusion must remain.

Europe is entering a very interesting period. Growing labour conflict in France and Germany, and the squabbling of these two countries over the Stability and Growth Pact, are of course very negative for the EU economy. Paradoxically, however, they will be helpful in preventing the euro from appreciating too much. Optimists among us could see in the forthcoming "Autumn of Unrest" a none-too-early chance for Chirac and Stoiber (well, it does look like he will win) to show their mettle in echoes of the miners' strike in the UK at the height of the Thatcher reforms.

The latest Edward Fagan attack on Swiss and other banks gives us and, we suspect, most of our readers in Europe, a very nasty taste. Part of the much-needed return from artificiality in the USA includes a cessation of abuse of the law and of the culture of excess. Fagan epitomises both. At least most of the corporate icons have now fallen and shareholders are making their disgust clear over multi-million dollar reward packages for those who preside over multi-billion value dollar destruction. In Europe, Ron Sommer and company seem to have got the message, but Sir Christopher not yet!

Yes, Andersen was bad and probably deserved its punishment, but our sense is that many more severe abusers have yet to be brought to justice.

Recommended average maturity for bonds in each currency
No change since 12 June.

Last week's much lower than expected consumer confidence figures continue to put pressure on US equity markets, which has had a knock effect on European and Japanese stocks as well. The sentiment remains clearly negative towards the dollar, with the tense Mid East situation, India- Pakistan, renewed pressure on the Real with the upcoming October election in Brazil and no solution on Argentina yet, all putting investors on the defensive.

EUR/USD: Again, corrections have been minor and the EUR has so far tested only the 0.9400 area on the downside. A clear break of 0.9540 would lead to our the next objective of 0.9600, followed by 0.9650. The trend for a higher euro looks well established, but any future advances might not be achieved so easily as in the past. Supports levels are at 0.9390, 0.9340 and 0.9280

USD/CHF: The 1.5500 support was finally broken and our target of 1.5410 reached. The next objective is 1.5350, then 1.5280 and 1.5200, while 1.5650, 1.5720 and 1.5800 are acting as solid resistance levels.

USD/JPY: Any loss of 122.50 (the zone that has been protected by the BoJ so far) would send the dollar immediately down to 120.00. Verbal interventions by the BoJ are still having their effect, but the upside looks limited to the 125.00 to 125.50 area.

EUR/JPY: Key support is at 117.80. So long as the rate is above this, a possible retest of the outstanding high of 119.50 is possible. Consolidation in a range of 118.00 to 120.00 may be expected.

USD/CAD: All commodity currencies continue to be well supported, but some consolidation is expected first. For the Canadian dollar the range should be 1.5300 to 1.5550.

AUD/USD: The target on the upside is 0.5730 and 0.5780. The downside should remain well supported around 0.5650 and 0.5500.

GBP/CHF: The GBP managed to recover a bit of its recent lost territory. 2.2850 is now providing major support, and a weekly close above 2.3000 would help open the door for 2.3150 and then 2.3250 for this cross.