Bond Outlook
[by bridport & cie, December 19th 2001]
The end of 2001 leaves us with a series of questions for which only
2002 contains the definitive answers. |
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When will traction be achieved? |
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Financial markets say during the second quarter of 2002. Many
economists say at the end of 2002 or beginning of 2003. Even as we write
this, Motorola are announcing more job cuts, and it is supposed to be the
tech sector that leads the recovery. Our view: we side with the
economists, a delayed recovery. |
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How fast will recovery then be? |
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Again markets are discounting a rapid recovery, whereas many
commentators are expecting a more modest rebound, e.g. 4% in 2003 vs. the
more typical 5%+ of other post-War recoveries. The imbalances in the US
economy suggest that there will be long-term dampeners on growth
until significant rebalancing is allowed to take place. |
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Whither stock
markets? |
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The stock price recovery of the last quarter of 2001 is liquidity
fed. Stock prices have now largely disconnected from fundamentals,
reaching PEs even higher than at the peak of the bubble. Markets are
discounting an early and rapid recovery in underlying profitability.
Earnings per share are still above average, but moving down. It seems
reasonable to expect them to cross the long-term average before turning
round. Historically a decade of high growth in corporate profits has been
followed by a decade of low growth. Current stock prices look high even if
recovery happens fast. If the slower scenario applies, just where stock
prices can, or will, go is far from obvious, but it is difficult to
answer "upwards". |
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Interest Rates? |
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If "traction" occurs in early 2002, then Central Banks are expected
to raise rates to combat inflation. That is what is priced into the yield
curve with its recent steepening. There are two reasons to doubt higher
rates, at least in the opening months of 2002: the first is that rapid
economic recovery is far from "in the bag", and the second is that
inflation is unlikely so long as production capacity has not crossed its
historical average (it is well below now and will need a year to rise
above it, even if all goes well). Better to plan on continued low rates
at the short-end. The long end appears to be oversold, and should
correct. Thereafter, however, the long end is very difficult to access -
all depends on the timing and degree of "traction". |
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Dependency on the USA? |
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Every now and again, like German politicians claiming that their
country is about to turn round, it is mooted that Europe, at least, could
recover independently. In light of the ever greater politico-economic
power of the USA, enhanced by the Afghan War, this looks like wishful
thinking. Like or not, everyone has to keep looking to the USA to pull
the entire world out of recession. |
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The euro? |
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Some believe it will fail and the whole EMU fall apart. Others see
it as an amazing experiment, which will lead to greatly increased
competitiveness, lower operating costs and benign deflation. How will the
euro zone cope with a major country (we are thinking of France) yielding
immediately to inflated wage claims in the public sector, while obliging
the private sector to shorten its working week? We remain cautiously
optimistic on the success of the euro experiment, and on the euro
strengthening once it is in circulation. |
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*** |
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We could not resist giving tentative answers as we went through our
question list, but each reader will surely have his/her own views. Putting
all the questions together, they make a "grand question", one that not
even 2002 can be counted on to answer once and for all: |
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Can financial markets really anticipate economic recovery before
and independently of economic analysis? |
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The entire bridport team in both Geneva and Jersey wish our clients
and readers a very Happy Christmas, a thorough "unwind" and a successful
New Year. Our next weekly will be written on Wednesday 9th
January. |
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Recommended average maturity for bonds in each
currency We leave our recommended average maturities at a little
under five years. |
Currency: |
USD |
GBP |
EUR |
CHF |
Over the period
15.08.01 to 21.11.01 |
2008 |
2006 |
2011 |
2011 |
As of
05.12.01 |
2006 |
2006 |
2006 |
2006 |
|
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Liquidity is getting thinner and thinner and the big mover,
as always over the last three years at this time of year is the
yen. A worsening economic picture in Japan, and with the USA not
out of the doldrums, the BoJ and the Government are desperately trying to
find a way to fight off the recession and its deflationary effects. So
far, we have heard of no opposition to a weaker yen whether in the US,
Japan or any other Asian countries. It therefore looks like a weaker YEN
is on the cards, at least until China wakes up and devaluation talks
surface. That could occur, however, well above USD/JPY
130.--. |
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EUR/USD: the euro remains well supported
in the 0.8800 to 0.8850 area and established itself just slightly above
0.9010, but needs to hold on a weekly basis if further advances are going
to be achieved, with 0.9080, 0.9150 and 0.9280 as next resistance
levels. |
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USD/CHF: a broad consolidation
pattern in a 1.6150 to 1.6800 range looks the most probable outcome for
this volatile currency pair. The 1.6480-1.6530 level remains key, a weekly
close below opens the downside, while above indicates a retest of the
topside. |
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USD/JPY: the Yen will continue to be
under pressure, but the 128.50 to 129.00 area look to be difficult to
overcome in the first attempt. Downside support comes in at 127.30 and
126,50, followed by key support at the 124.80 to 125.30 area. Any
substantial correction should be used to re-establish a short yen position
with targets at 130.--, followed by 132.50. |
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EUR/JPY: our target of 115.00 has been
reached much more quickly than we thought and even exceeded with a move to
slightly above 116.00. Key support is around 114.60, followed by 113.50.
Topside targets 117.20 followed by 118.50 and more out 120.00. Here as
well, use any major correction to establish a long EUR/JPY
position. |
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USD/CAD: consolidation in a 1.5600 to
1.5800 range expected. |
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AUD/USD: same comment: the Aussie has
created a solid base above 0.5000 and solid support comes already at
0.5110. The topside should be limited to the 0.5280 to 0.5310
level. |
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GBP/CHF: extreme volatility in this
cross will continue. Support has gradually moved higher and comes in at
2.3450. Topside resistance is at 2.3980. Consolidation in this range
expected. |
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Seasons Greetings
from the GNI team. |
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USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.6530 |
0.9080 |
1.4780 |
128.50 |
114.50 |
Current spot
level |
1.6380 |
0.9000 |
1.4750 |
127.80 |
115.20 |
Support/Breakout |
1.6250 |
0.8950 |
1.4610 |
125.50 |
116.30 |
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AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.5280 |
0.4280 |
1.5780 |
1.4630 |
283.00 |
Current spot
level |
0.5140 |
0.4160 |
1.5750 |
1.4510 |
279.50 |
Support/Breakout |
0.5050 |
0.4080 |
1.5550 |
1.4450 |
272.50 |
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