The labour unrest in France, so easily foreseen after the elections (and mentioned in this Weekly), is now in full swing, mirrored in the United Kingdom. Both mount challenges to the Governments. Their outcomes are likely to set the economic scene for many years to come. Can public sector workers be persuaded or forced away from their restrictive practices and special privileges, and farmers to accept a totally different basis for earnings than the Common Agricultural Policy? Can Governments carry out their policies on privatisation and opening up of competition? These are issues of vital importance not just for the two countries involved, but for the whole of Europe's prosperity, at the very least. Germany is already lost for any reform under its stale Government; which is all the more reason why the French and British Governments must show their mettle.

Parallels with the miners' strike under Thatcher come to mind. The miners were "doing a King Canute" (ordering the tide not to come in, although the good King knew very well he would not be obeyed!), as the demand for coal was falling and destined to fall further. The same cannot be said for firefighting, but a similar strategic issue is that there are many applicants for every open fireman's job and public sympathy is declining. French farmers, rail workers, civil servants, post, telecommunication and power-generation workers have far less domestic pressure against them. They will be able to fight a rearguard battle for many years, until finally economic reality, and competition imposed by Brussels and by the new EU members force changes in extremis. It is encouraging, however, that the French Government stood up to lorry drivers attempting to block the entire country.

Europe has many positive economic attributes, including, for the euro zone, a positive trade and payments balance, room to decrease interest rates and increase consumer spending and a strong private sector. Moreover, stocks have more reasonable PE ratios and there is less deception in financial reporting. If only, now, the public sector could be "tamed". That "taming" includes pension schemes. It is outrageous that public employees should enjoy defined-benefit schemes plus early retirement when the private sector is obliged to move to defined-contribution, with no promises on capital accumulation or conversion rate to pension flows. It is fundamentally unfair that the present working population have to pay for the pensions of people who have not saved sufficiently in their working life. Such inter-generational capital transfer is simply untenable, an example of official denial as bad as anything we are seeing in the USA about the state of the economy (of which, enough last week!).

In the UK, the link between the public sector strikes and the economy is very clear. The pound has fallen and the BoE has moved to a tightening stance, lest public sector rises simply soak up excess money supply. The link is more tenuous in the euro zone. The ECB may be so stubbornly independent (removed from economic reality?) that the interest rate cut "everyone" is demanding just may be refused in December.

Fixed-income investors have few attractive options at this time. The bond rally has run its course as stock markets are advancing, even if only temporarily. Spreads are coming in both for corporates and emerging market sovereigns. In the latter there is little room for further price improvement, not even for our favourite, Russia. Some of our clients are seeking a few basis points in the Nordic countries and even in exotics like Chinese domestic bonds.

Despite our general preference for extra yield from emerging markets rather than corporates, the game of picking up distressed sovereign debt when it is "dirt cheap" (like Russia in late 1998) has a scarce-recognised danger to it. Eurobond holders are likely to be only fourth in the queue for any funds available from restructuring. The IMF, World Bank and domestic debt holders are all ahead.

Today we have nothing to add to what we have already said on the USA and Japan; Europe's future prosperity is being played out with "Green Goddess" fire engines, tractors on the streets and cancelled trains and planes!

Recommended average maturity for bonds in each currency.
The profit taking on bonds implied by the reduction from ten to five years early this month has proven appropriate. No further move is yet in sight.

The honeymoon above parity for the euro has again been short lived. The recovery in equity markets, together with investors being again a little more risk oriented in general, has helped the US unit. The forthcoming Thanksgiving weekend, coupled with thin market conditions, could well be preparing a surprise. The pound needs to be watched carefully with more and more pressure on the Blair government from the public workers and the farmers.

EUR/USD: Since parity was broken, 0.9950/80 has been acting as a major resistance. A break would be needed at 0.9880 and 0.9850 and, finally, at 0.9820 to head in the direction of 0.9700. Short-term consolidation in a 0.9850 to 0.9960 range is expected with a tendency still towards a lower euro.

USD/CHF: 1.4730/50 will act as the first major support area, and our price objective of 1.4850 has even been overshot for the dollar to reach levels slightly above 1.4900. The next resistance is at 1.4930, 1.5010 and 1.5150. Consolidation is expected in a broad 1.4750 to 1.4950 range.

USD/JPY: Same comment: we still believe that the BoJ will defend the US unit between 118.00 and 120.00. Major support is at120.50. Topside resistance is 122.80, 123.10, 123.80, followed by 124.50.

EUR/JPY: The breakout on the upside, testing a level above 123.00, turned out to be false. The sell off took out the support at 122.30 and exchange rate returned to the old trading range, with 120.30/50 acting as the major support zone. Only a weekly close below would pressure this cross further, and speak for 119.50 at least

USD/CAD: We recommend keeping long CAD exposure established in the 1.5900 to 1.6000 zone. Resistance is at 1.5780 and 1.5810, and support at 1.5720 and 1.5650.

AUD/USD: Consolidation is in a 0.5510/30 to 0.5650 range. A drop below 0.5480 would send the Aussie immediately lower, with 0.5430 as the first objective.