Global Briefing: European Stocks, Bonds Play Catch-Up

Rallies in the U.S. while Europe was on holiday lead to a strong rally across the Continent.
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The Nikkei reversed early losses to close higher, while Japanese government bonds fell ahead of tomorrow's 20-year bond sale. European markets reopen for the first time since last Thursday and play catch-up with the U.S., as both stocks and bonds are posting broad advances. The dollar is generally posting modest losses amid profit-taking, with the notable exception of the British pound.

The Nikkei initially shed 250 points as domestic participants locked in profits on the recent strong rally. Issues that participated in the run-up, like autos and electronics, appeared to lead the profit-taking move. But rumors that the Japanese government was considering yet another fiscal stimulus package helped the Nikkei recover, bouncing almost 400 points off the intrasession lows.

The yield on Japan's benchmark bond rose 5.5 basis points to 1.795%.

Japan will auction almost $5 billion worth of 20-year bonds tomorrow. It will be the first sale of government bonds with such a long maturity since the middle of January. The volatility of the long end of the Japanese yield curve and the tremendous amount of fixed-income instruments the government intends to sell in the coming months will likely deter aggressive buying at tomorrow's auction. Dealers appear to be demanding a concession in the form of a higher yield.

While another supplemental budget in Japan cannot be ruled out, it seems premature to focus on it. Finance Minister


and a couple of leading LDP officials argued earlier in the session that the economy did not require additional stimulative measures. Some talk had linked a 10 trillion-yen (roughly $82.5 billion) supplemental budget to the election of a new head of the LDP.

However, in recent days, senior LDP officials have floated the idea of foregoing an election and allowing Prime Minister


retain the post until July 2000. While Japanese officials have to be prepared to provide the economy more stimulus, many will be reluctant to rely on more deficit spending, which could result in a further downgrade of credit worthiness and undermine efforts to prevent a sharp backing up of long-term yields.

European asset markets are playing a bit of catch-up with the advance posted in both U.S. stocks and bonds

since the major European centers closed for the Easter holiday. European bond yields are 4-6 basis points lower, with the yield on the benchmark 10-year German bund off 5 basis points to 3.96%. The U.S. 30-year bond yield dropped around 8 basis points while Europe was on holiday. Expectations of an ECB rate cut also may be weighing on bond yields. At 2.81%, Germany's two-year bond is offering a yield below the ECB's 3% repo rate, suggesting that at least a 20-basis-point cut is largely discounted.

European bourses are posting broad-based gains, as the various U.S. indices have moved into record territory. Most European equity markets were up 1%-1.5% in late morning turnover. Telecommunications, drug and oil companies were among the top performers.

Fresh fundamental news from Europe today was light.

Of note, Germany's new finance minister appears to be signaling a softening of the government's stance toward the proposed withholding tax on bond income in the eurozone. Some reports suggest that as early as next week, Germany may propose to limit the tax to investments greater than 40,000 euros, or roughly $43,000. The withholding tax proposal faced opposition from the U.K. and Luxembourg, which feared that the tax would undermine their role as financial centers. Other EC countries hoped the tax would discourage investors seeking to avoid taxes by booking investments in other European centers.

The euro is slightly firmer against the dollar today, but market participants are not showing much enthusiasm.

Support for the euro is seen near $1.0680-$1.0700. On the upside, it will take a convincing move through the $1.08 level to squeeze out some of the late shorts.

I continue to believe that the euro could stage more than a 2-cent rally in response to an ECB rate cut that can be delivered as early as Thursday. The $1.07 area for the euro roughly corresponds to where it would have been last May when Europe formally decided who was going to participate in monetary union and at what levels their currencies would be linked forever more.

Sales of dollars against the yen by Japanese exporters reportedly helped push the greenback off yesterday's high near 122 yen.

Support is seen near 120.80 and a break of this, especially on a closing basis, would warn of a further near-term setback.

Of particular note today, sterling is trading heavily. It has fallen to a new low for the year against the dollar. The next objective for sterling is near $1.5850 area. Sterling is also losing ground against the euro. The euro needs to rise above 0.6800 sterling to boost confidence that a low of some significance is in place. Note that against the old mark, sterling is falling through the 2.90 level with some momentum. The next target is near 2.8750. Many expect the

Bank of England

to cut rates 25 basis points on Thursday, but unlike the

European Central Bank

, speculation of yet another cut will begin almost immediately.

Brazil announced its second interest rate cut in as many weeks yesterday

, bringing down its key rate to 39.5% from 42%. The central bank's monetary policy committee meets again on April 14 and another rate cut then is possible. Price pressures that many feared would explode following Brazil's devaluation have been relatively modest. In San Paulo, one of Brazil's largest cities, inflation for the four weeks ended March 26 rose 0.8%, compared to 0.96% for the previous month. The 14% appreciation of the Brazilian real over the past month will also help curb price pressures.

News reports indicate that last week, the largest auto makers in Brazil slashed the interest on new car loans from 3.89% a month to 2.89%. The lower interest rates may help revive Brazilian auto sales, which have fallen by more than half over the past year. Note that today marks the end of the 90-day moratorium declared back in January by Minas Gerais governor and former President Itamar Franco. The moratorium is perceived to be one of the triggers of the crisis that resulted in Brazil's devaluation.

Marc Chandler is an independent global markets strategist who writes daily for At the time of publication, he held no positions in the currencies or instruments discussed in this column, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at