Bond Outlook
[by bridport & cie, June 26th 2002]
So much for our forlorn hope that the downward adjustment to the
dollar would be a nice, controlled affair! The problem with vicious
circles is that they are - well - vicious. WorldCom's admission of
accounting fraud is another nail in the coffin of investor faith in
corporate America. Andersen's claim that they did not know about the
misstatement is all too believable, although just how any one who claims
to be an auditor can fail to verify the valuations of assets (in this case
"capitalised expenses") beats us. It is a grim choice when we have to
decide between connivance and incompetence in the audit profession, for,
although Andersen are dead and all but buried, the stench spreads far. The
whole audit profession needs to work hard to re-establish its
integrity. |
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It is worth reflecting on what will happen to WorldCom, still the
leading owner of IP networks in the USA and elsewhere in the world. With
its share price expressed in cents, and laying off 17,000 people
immediately, the very survival of the company is in serious doubt.
Conceivably WorldCom can be bought by another telecom company, but who
among the BTs, FTs and DTs of this world is likely to have the courage,
even at a knock down price? No one will be prepared to take on USD 30
billion of debt. Perhaps someone will buy the assets and let the creditors
go hang. The latter include a long list of banks with exposures measured
in $ 100s of millions. Knock-on effects in the banking world are
inevitable. Beyond that, if WorldCom is taken over for a song, the new
owners will have a 65-country network with very little need to charge high
connection fees to cover debt servicing and depreciation charge. The
temptation of WorldCom Mark II, with a much less expensive asset base,
will be strong to go for market share through lower prices. Watch for
knock-on effects on other telecom operators. |
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Downgrading of telecom ratings continues unabated, at great cost to
the companies as they face higher coupon rates. The power of the rating
agencies is huge, even if they often confirm what the market has already
decided. They hit Abbey National a fortnight ago. Yet, press reports
suggest the warnings about inadequate risk controls in Abbey's treasury
division go back to the mid-90s. Whom will the rating agencies hit next?
Could it be the Landesbanks? While we are well aware that
independent rating is a necessary service, we would question the
agencies' power, their de jure oligopoly (just three approved by
the US Government), their protection from prosecution (moral hazard if
ever there was one!), and the whole basis of the company being rated
also being the paymaster. Our sense is that the way rating agencies
operate needs to be part of the revamp of financial governance that the
USA and other countries have to go through. |
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In recent weeks we have been very critical of the USA and its
Administration for "artificiality". That word reflects how the investing
world is now perceiving the USA, both economically and politically. We
choose our words carefully, well conscious of the range of views of our
readers, but the fact is that the Bush speech on the Mid-East cannot be
perceived outside the USA as even-handed. Even Blair has had to distance
himself from it. |
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The UK in the meantime will have a serious decision to make about
Europe. While the USA rode high, it was nice to hang onto its coattails.
As the pound follows the dollar down, there will come a point when
attaching it to the euro will look attractive. Politically, too, the UK is
siding more with Europe, and not just over foreign policy, but also over
such vital issues as protectionism and farming subsidies.
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We have been saying stay long in bonds and in quality. At such
times, that is the only place to be. |
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Recommended average maturity for bonds in each
currency No change since 12
June. |
Currency: |
USD |
GBP |
EUR |
CHF |
As of
12.06.02 |
2009 |
2007 |
2009 |
2009 |
|
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The climate on the equity markets remains extremely tense. The
recent drop in US consumer confidence, with the tax cut benefits already
out of the way, has renewed doubts about the strength of the recovery. On
top of that, the credibility of the US accounting system is once again
under question, with WorldCom in the spotlight after Enron. Fresh business
investments are now likely to be postponed further, until a clear sign of
a pick up in consumer spending is seen. However, a lower dollar might help
the USA to correct its trade imbalances, while a higher euro is probably
delaying any immediate rate hike by the ECB to keep inflation under
control. |
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EUR/USD: Corrections have remained
minor so far. After 0.9540, 0.9650 and 0.9850, the exchange rate has now
reached 0.9940 so far. The next levels are 1.0020, 1,0100 and 1.0220.
Downside, the first support comes in at 0.9850, followed by
0.9750. |
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USD/CHF: One way traffic, the
1.5500 level has been broken; gone also are important chart levels at
1.5300, breaking the medium and long-term up-trend of the dollar. A level
slightly below 1.4800 has been reached. Support levels are at 1.4730,
1.4680 and 1.4550. Upside resistance is at 1.4930, 1.5000 and
1.5150 |
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USD/JPY: As mentioned last week, the
protected zone by the BoJ at 122.50 did indeed give away and sent the
dollar immediately down to 120.--. The exchange rate is nearly 119.00 now,
and next supports are 118.50 followed by 117.80. It has to be seen if the
BoJ is still eager to buy the USD to weaken the JPY in a now obvious USD
bear market. |
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EUR/JPY: Same comment: key support at
117.80 is holding for the time being. The outstanding high of 119.50 has
been retested a couple of times. Consolidation in a 118.00 to 120.00 may
be expected. |
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USD/CAD: All commodity
currencies continue to be well supported. After testing levels in the high
1.54's, the downtrend has continued, breaking 1.5300 easily to reach
nearly 1.51. Next levels are 1.5030, 1.4980 and 1.4910. Topside is 1.5180
and 1.5250 and 1.5330. |
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AUD/USD: Same comment: the target on
the upside is 0.5730 followed by 0.5780. The downside should remain well
supported around 0.5650 and 0.5500. |
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GBP/CHF: After touching levels above
2.3100, the GBP broke key support at 2.2850 and has reached levels around
2.2600. The next support levels are at 2.2550 2.2480 and 2.2300. Upside,
2.2850 is acting now as major resistance. |
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|
USD/CHF |
EUR/USD |
EUR/CHF |
USD/JPY |
EUR/JPY |
Resistance/Breakout |
1.4930 |
1.0030 |
1.4780 |
120.20 |
119.50 |
Current spot
level |
1.4795 |
0.9910 |
1.4670 |
119.00 |
118.20 |
Support/Breakout |
1.4650 |
0.9850 |
1.4620 |
118.50 |
117.80 |
|
AUD/USD |
NZD/USD |
USD/CAD |
GBP/USD |
XAU/USD |
Resistance/Breakout |
0.5730 |
0.4930 |
1.5280 |
1.5350 |
331.00 |
Current spot
level |
0.5650 |
0.4865 |
1.5145 |
1.5270 |
322.75 |
Support/Breakout |
0.5610 |
0.4750 |
1.5050 |
1.4980 |
315.00 |
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