Bond
Outlook [by bridport
& cie, March 26th 2003]
There is something rather distasteful about equity markets and the
dollar bouncing up and down as a function of battlefield news and hype. It
certainly makes it difficult for us to keep our focus on fundamentals and
secular trends while war excitement reigns. All the more reason, then, to
persist. |
|
All the economic news out of the USA is negative, but tinged with
unreality, almost as if patriotism is overriding good sense:
|
|
- The $ 400 billion
federal deficit is widening to $ 500 billion because of the war (numbers
almost identical to the external current deficit), yet the
Administration is seeking tax cuts (now sensibly reduced by the
Senate)
- Consumer confidence
is at the lowest levels since October 1993, yet consumer spending and
house purchasing just keep on expanding
- Investor optimism
reached a new low this month, but equity markets rally.
|
|
"But it's all only make believe!" (Roy Orbison's song as
national anthem?). Or, as the FT succinctly puts it: "In Mr Bush's
dream world, you can fight an enemy and hand out tax relief at the same
time." |
|
Many asking questions at this time about whither the world in the
light of the breakdown of multi-lateral decision-making. Our question is
of a more economic nature: whither the world when its superpower has
overspent? An argument we first expressed three years ago is gaining
strength: a country, even a superpower, which depends on the rest of the
world buying its assets at a rate of $ 400 billion (now $500 billion) per
year, cannot maintain a strong currency if (or rather "as") its assets
become less attractive. Moreover, the situation is inherently unstable.
Attractiveness is first measured as rates of return, already very low for
US assets, but worsens if it is suspected that the currency of those
assets has still further to fall. From the end of World War II to the
early 1980s, with a brief exception in 1973/4 when it looked like the OPEC
countries would buy up the world, the USA net asset balance (what it owns
minus what it owes) was 5-8% of its GDP. Europeans feared that their
industries would be entirely owned by Americans. The balance is now
minus 20%, and worsening at nearly 4% per year (source:
Bridgewater). |
|
A weaker dollar will eventually lead to inflation, but the
deflationary forces in the USA are still very strong. A stronger euro, the
inevitable flipside of a weaker dollar, cannot help the European
economies, unless Europe itself can provide a demand motor. We hold
on to that hope like a drowning man to a straw. We look for signs, e.g.
for a move to an external deficit, now easily supportable. Then, can the
Germans reform their costly welfare system? Schroeder's announced policy
looks encouraging (it must be, as the unions are screaming!), but can he
deliver? If yes, his country and his chancellorship could be saved. If no,
the CDU is just waiting to implement even stronger reforms.
|
|
The UK is in an intriguing situation, both economically and
politically. An ally of the USA, with hopes (pretensions?) of being a
moderating influence on Bush, it is more disenchanted than ever with
France and Germany (and therefore the euro). With unemployment at a
Swiss-like 3.5%, its economy cannot be so weak as some commentators were
saying just a month ago. The housing bubble is deflating, but not
collapsing. UK consumers are pulling in their horns, but gently. The pound
is finding sensible levels between the dollar and the euro. Blair could
well end up a principled hero in the eyes of the electorate. The reward of
fighting alongside the USA will be to participate in Iraq's
reconstruction, a further fillip to the economy. On Blair, more than on
Bush, will also fall the task of European reconciliation after the war,
although we can hardly see French companies being lead participants in
rebuilding Iraq! |
|
A problem country is emerging as result of the Iraq conflict:
Turkey. The temptation for the generals to invade "Kurdistan" is enormous,
and US appeals and bribes will not stop them. A clear view from the EU
could yet hold Turkey back, something like, "Invade Northern Iraq and kiss
goodbye to the European Union". In the meantime, its bonds are extremely
vulnerable. Brazil and Turkey have changed places in the bond market.
|
|
Recommended average maturity for bonds in each currency
|
|
We maintain our recommendation for maturities in euro to average
ten years. |
Currency: |
USD
|
GBP
|
EUR
|
CHF
|
As of
22.01.03 |
2008
|
2008
|
2013
|
2008
|
|
|
The big washout in bonds, metals, petrol, equities and the dollar
seems to have stalled, at least for the time being. More consolidation is
in the pipeline, and the market is very sensitive to news coming out of
the Middle East. There is no clear trend in the short term, but we would
suggest that any strong USD rally should be seen as a medium-term selling
opportunity |
|
EUR/USD: 1.0670 remains the key level.
After testing a low of 1.0503 so far, the euro recovered to a high of
1.0722. Consolidation in a 1.0550 to 1.0750 range is the most probable
outcome |
|
USD/CHF: Here, 1.3730/50 remains the key
pivotal point. After testing a high of 1.4050, the market pushed the U.S.
unit down to 1.3730. Consolidation in a 1.37 to 1.4050 range may be
expected. |
|
USD/JPY: As book closing is coming to an
end in Japan and the new team at the BoJ is already looking for more
stimulus measures, it looks like 117.- and below will still be protected
by the MoF. Support has moved up to 118.80, and resistance is now at
121.10 and 121.80, followed by 122.50 |
|
EUR/JPY: Broad consolidation in a 125.50
to 129.50 range is underway, the euro coming off the lows and testing the
upper side of the range again. |
|
GBP/USD: Key level is at 1.5850. A low
of 1.5535 has been seen so far. The next big support is at 1.5450. Only a
weekly close above 1.5850 would open the door for a retest of 1.6100.
|
|
USD/CAD: Since key support at 1.5050 has
been broken, the CAD remains one of the market's favourites. The next big
support is at 1.4650 and 1.4580. Upside resistance is at 1.4850 and 1.4930
|
|
AUD/USD: Same comment: key level is
around 0.5970/0.6000. Below this, the objective would be 0.5880, followed
by 0.5830. Topside, a weekly close above 0.6000 would be needed to
generate some renewed buying interest. |
|
|
USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.3880
|
1.0655
|
1.4780
|
120.80
|
128.50
|
Current
spot level |
1.3840
|
1.0635
|
1.4745
|
120.35
|
128.20
|
Support/Breakout |
1.3770
|
1.0580
|
1.4680
|
119.80
|
127.80
|
|
AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.6010
|
0.5580
|
1.4810
|
1.5780
|
338.00
|
Current
spot level |
0.5975
|
0.5495
|
1.4720
|
1.5730
|
330.00
|
Support/Breakout |
0.5880
|
0.5450
|
1.4650
|
1.5650
|
325.00
|
|
|