Bond
Outlook [by bridport
& cie, April 23rd 2003]
How curious to read so many commentators taking the line that we
have been propagating for so long, that the US economy is bust. It is
hardly surprising that a European commentator like "Independent Strategy"
shares our view, or that Stephen Roach of MSI. does. We are, however,
still bemused by the archetypal "gung-ho" Business Week publishing lists
of reasons to doubt, identical to what we have been writing in this
Weekly. None of this stops the stock market going up if it wants to! We
can blame that phenomenon, using Roach's words, on "the romance of
military victory being transferred to market emotion", concluding that the
market bounce will run its course before bear markets return. Roach offers
us five myths about the supposed recovery: the world is too US-centric,
capital expenditure cannot recover with such low capacity utilisation, US
savings are too low, deflation is still a risk and the rest of the world
is in the doldrums. |
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Right! We are all agreed on that. Is there any hope somewhere? Our
long held position that the euro is going up despite itself holds true,
because Europe is stably stagnant as distinct from America being unstably
dynamic. The Swiss franc and sterling are not going up with the euro, so
those economies should be less stagnant. Russia is getting economically
stronger, with the Yukos/Sibneft merger reinforcing that trend. Japan just
may be doing something to solve its banking problem in opening up bank
ownership to foreigners, apparently with some implicit guarantees.
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Still the world is fixated on the USA, unable to believe that such
a superpower could be an economic weakling, but all the time thinking that
it might be. Thus, investors step gingerly into the stock markets, while
covering their bets in fixed income. The traditional inverse relationship
between equities and bonds has broken down, as has the direct correlation
between the US dollar's value and the Dow. Part of the reason for the
former is the growth of the credit derivatives markets, which have
gradually been making investors in corporate debt more conscious of risk
and of the possibilities for hedging. Besides, the world is in a post-war
"search for yield" mode, causing spreads virtually everywhere to contract,
and reinforcing the "high-yield" currencies of Canada, Australia and New
Zealand. |
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A small dent to confidence in emerging markets has arisen this week
with Jamaica's problems suddenly receiving attention. The internal deficit
has reached 7.7% of GDP, part cause of the country's problems. We cannot
but be reminded that a certain superpower to the north is heading towards
figures like this! |
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Our recommendations on maturities stand, despite our concern about
USD-denominated bonds. The bearish and deflationary scenario we expect
would push us to lengthen, but our clients are shortening in dollars,
presumable just in case the equity rally is for real. |
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Let us finish with the scenario we would expect to see if all
governments did away with unreality: |
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- The dollar's
weakness will lead to a US economic revival via exports
- Deficit spending in
the USA in both the Government and the household sectors will allow
savings to accumulate ready for investment in industry (that will take
three to four years)
- Japan and Germany
will reform to the point where domestic demand reasserts itself, both
countries providing alternative demand motors to the USA
- Further demand for
the world's goods and services will come from Russia and China as the
wealth generated by these countries spreads through to their populations
- World trade is
conducted in a sensible mix of US dollars and euros
- The UK steers clear
of the euro and continues in both economic and political terms to build
on its unique position between the USA and Continental Europe.
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We believe in this scenario, because economic fundamentals
eventually have their way. Readers who have been with us since early 2000
may recall what we said then, that it would take a full decade to
rebalance the world economy after the bubble, a decade of poor returns and
a weakening US currency. The decade is just one third through. "So far, so
good", or, if you prefer, "so far, so bad!" |
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Recommended average maturity for bonds in each currency
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We maintain our recommendation for maturities in euro to average
ten years. |
Currency: |
USD
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GBP
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EUR
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CHF
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As of
22.01.03 |
2008
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2008
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2013
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2008
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This week, we are rather obliged to repeat much of what we said
last week: equity markets are recovering, as are the signs of some
investors moving out of fixed income and back into equities. Earnings are
coming out slightly above market expectations and crude continues in its
broad USD 25 to 30.- trading range. A weaker oil price over the next
couple of months will be welcome for the world economy, still looking for
growth. Unfortunately, such optimism might be rather premature and range
trading is the most likely outcome in forex. |
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EUR/USD: The 1.0760 pivotal point has
been broken and is now acting as major support. Levels of nearly 1.1000
have already been tested. The euro retains its firm undertone against
everything, with the next hurdle being 1.1050 followed by 1.1120.
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USD/CHF: Levels above 1.4000 are
unsustainable for the moment and represent a selling opportunity. Critical
support at 1.3780 has been broken again, with 1.3680 as the next important
level on the downside. A clear break would spell further dollar weakness,
with 1.3640 and 1.3550 as the next targets. Upside resistance is at
1.3780, 1.3820 and 1.3850 |
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USD/JPY: There is strong support below
118.00. Upside is at 120.80 and 121.10, with a weekly close above looking
for 122.50. Trading in a range from 118.00 to 121.30 looks likely.
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EUR/JPY: Breaking the psychological
barrier of 130.00 took the rate directly to our first price objective of
131.50, with a high of 131.90 so far. The next resistance is at 132.30,
132.80 and 133.50. Big support comes in at 130.20. |
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GBP/USD: As last week, the key level is
at 1.5850. Consolidation in a 1.5500 to 1.5850 range may be expected.
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USD/CAD: The CAD remains one of the
market's favourites. The strong support at 1.4550 has now been broken. The
next supports are at 1.4420, 1.4350 and 1.4200. Important resistance is
around 1.4720 |
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AUD/USD: The break and weekly close
above 0.6000 generated some fresh buying, and our objective of 0.6180 has
already been reached. The next levels are 0.6230 and 0.6280. Big support
is at around 0.6110. |
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USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.3780
|
1.1050
|
1.5130
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120.80
|
132.30
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Current
spot level |
1.3745
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1.0955
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1.5075
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120.10
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131.60
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Support/Breakout |
1.3680
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1.0880
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1.5010
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119.80
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130.30
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AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.6250
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0.5750
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1.4550
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1.5780
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336.00
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Current
spot level |
0.6205
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0.5610
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1.4460
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1.5735
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334.00
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Support/Breakout |
0.6150
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0.5550
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1.4420
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1.5650
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328.00
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