Despite our every attempt to separate fundamental economic issues from the impact of the war preparations, the latter can no longer be ignored in our analysis of where financial markets are going:

• The dollar is weakening faster than it would have otherwise, not least because of Mideast investors switching from dollars to, notably, euros for political reasons
• The war risk is combining with the effects of the Venezuelan strike to push up oil prices
• Stock markets are declining faster than even our expected re-adjustment would indicate
• Gold and commodities are all up more than the dollar is down
• The chance of an economic upswing and of an increase in interest rates is still lower.

Since, for many months, we have already been recommending asset protection over the search for yield, these war pressures reinforce that basis recommendation. We can, however, be a little more precise in suggesting where assets can best be protected, although, again, we are not saying anything we have not said before. Even if only by default, the euro is strengthening and euro-based quality bonds are the main place to be, with some diversification towards commodity currency bonds. There is every likelihood of a further drop in rates by the ECB. This is clear both from analysis of the fundamentals and from remarks by the like of Welteke of the Bundesbank. The expectation of lower ECB rates makes us recommend lengthening the euro component of portfolios. This recommendation has two grounds: we can only see lower rates in Europe over the coming year; and the uncertainty of the Iraq war means little positive opportunity until the war is over or clearly off the agenda. The same "safe haven" argument applies to the Swiss franc, but yields are so low anyway, it is scarcely worth lengthening.

If we can cut through the distraction of the war threat, the fundamentals are still moving in the direction of slow repair to the damage done by exaggeration. The process seems to be most advanced in the UK, where, somewhat to our surprise, Eddie George, the retiring BoE Governor, plus a leading think tank, see a soft landing taking place (remember that expression!), based on rebalancing, advancing nicely. We remain a little sceptical, because the UK has gone down much of the American road to growth based on excessive debt. The Financial Services Authority has formally warned that an estimated 10% of UK consumer spending is financed by debt. The euro zone has a very different problem (inability to reform social and pension practice), but, unlike in the UK and the US, there is room both to lower rates and to expand domestic consumption.

The new agreement on the taxation of savings is a victory both for the UK and for Switzerland. Each gets its way: the UK intra-EU information exchange but no withholding tax to frighten away the Eurobond market; Switzerland continued banking secrecy and a withholding tax regime much like that for its own residents. Pressure is on other jurisdictions to accept the same withholding tax regime. We would expect the great majority of the tax havens to fall into line under eventual threat of sanctions, but just which jurisdictions are in and which out is not yet clear. The focus is on interest earned, not capital gains, and does not depend on the instrument. For the taxation of investment funds, Switzerland is very likely to follow its practice of making a distinction between a fund's capital gain (tax free in Switzerland) and its interest income. The use of fiduciary deposits to avoid the withholding tax is likely to be removed by the Swiss, even for its own residents, as it is "too obvious" a means of avoiding the tax. It may, however, remain for non-Europeans.

In the USA, pension funds have been building in an assumption of rates of return of 9.5%. Not surprisingly the regulators have put pressure on them to be more realistic. However, the new, lower figure at 9% still seems high. A figure nearer to 6.5% as proposed by Warren Buffet would seem more reasonable. The extra payments corporation are and will making to their pension funds will significantly hold back earnings.

Recommended average maturity for bonds in each currency

We are moving the recommendation for the euro from five years to ten.

EUR/USD: The euro managed to break 1.0650 and reached a high of 1.0745. The next levels are 1.0780, 1.0850 and 1.0920. It could well be that we are entering into a short-term exaggeration phase, and some profit taking on long euros could take place any time soon. Support is now at 1.0680, 1.0650,1.0580 and 1.0500.

USD/CHF: The support at the 1.3780/50 area has been taken out, and dropped to nearly 1.3600 so far. A clear break back over 1.3680 would be needed to see a correction in the direction of 1.3900. Supports on the downside are at 1.3550, 1.3480 and 1.3400.

USD/JPY: Verbal intervention by the Japanese has so far limited the downside to 117.50. The next support would be at 116.80, 116.30 and 115.50. We still believe that the BoJ will show its teeth, the US unit move too fast in the direction of 115.00. We still, therefore, have some appetite to re-establish a long USD/JPY position below 118.00. Topside resistance is at 118.80, 119.50 and 120.10

EUR/JPY: Extreme volatility continues in this cross. The trend remains up and 127.00 has nearly been seen so far. Next upside is 127.50, 127.80 and 128.50. Strong support is at 125.80, 125.10 and 124.50

USD/CAD: CAD continues its appreciation and has tested levels slightly below 1.5300. The next support is at 1.5260, 1.5220 and1.5150. Topside resistance is very strong at 1.5480

AUD/USD: Same comment: key support now comes in at 0.5780, followed by 0.5730. The trend remains clearly oriented to the upside with 0.5850, 0.5880 and 0.5930 as the next price objectives.