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Global Briefing: Mixed Messages Around the World

It's getting hard to argue Japan's exporting its way to recovery.

Global capital markets are quiet.

Public holidays throughout much of Europe have made for relatively subdued activity. No major U.S. economic data are slated for release until the second half of the week. Canadian markets are also closed today. Japanese investors were mostly sidelined ahead of tomorrow's 10-year bond auction as they tried to digest the preweekend earnings news from more than 500 companies. For its part the dollar is becalmed.

With today's modest gains, the


has strung together its first three-day advance in six weeks. Strong earnings growth and expectations for more of the same continue to underpin pharmaceutical issues.



, whose losses almost doubled in the year ended in March and are expected to double again in the current fiscal year, limited the index's gains, as did


, the country's largest international telephone company, which reported its first loss in 38 years. Ongoing concerns about the bad loan problem undermined bank shares, which have now fallen in nine of the last 10 sessions.

Unconsolidated losses for more than 1,000 Japanese companies that have reported last year's fiscal results were more than a quarter larger than had been forecast.

Japanese government bonds were little changed ahead of tomorrow's 1.4 trillion-yen 10-year bond sale.

The yield on the benchmark 10-year bond rose a half-basis point to 1.35%. The market is generally expecting a 1.4% coupon on the new issue, compared to a 1.5% coupon on the bond sold last month. Turnover was light, in the futures market about three-quarters of the 20-day average. The problem facing fixed-income investors is that money-market yields are just above zero -- even the two-year government note only yields 0.07% at an annualized rate. However, the volatility is sufficient in the intermediate to longer end to risk a good part of the additional return that is available.

It is increasingly more difficult to argue Japan is exporting its way into recovery.

Not only is the recovery proving elusive, but its exports are falling. Japan's April trade surplus fell 2.4% from March and is off 12.6% from year-ago levels. Exports rose 1.5% in April from March, but are down almost 7.5% from last April.

Other regional equity markets were mixed.

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Of note, Korea's


fell 2.1% to bring its cumulative decline since May 10 to 16%. The Kospi closed below the 700 level for the first time in a month. It is still up nearly 23% in local currency terms this year and more than 25% in dollar terms. Exporters, especially those that compete with Japanese companies, have reportedly led the recent slide. Meanwhile, a cabinet reshuffle has been announced that is apparently intended to reinvigorate the reform process. Eleven of the 17 cabinet ministers have been replaced. Kang Bong Kyuan, who helped institute key economic reforms nearly 30 years ago, has been named as the new economic and finance minister.

A public holiday has closed five of Europe's eight largest bourses.

Those that are open generally enjoy an upside bias, with London's


up more than 1.5%. Bank mergers real and anticipated continue to buoy that sector.

Telecom Italia


is higher, as is its suitor



Also of interest,



has revised its plan to sell its non-U.S. soft drink business to


(KO) - Get Coca-Cola Company (The) Report

after hitting some antitrust obstacles. The new plan reduces the sale of its operations to 100 countries, down from 120, and cuts the price nearly 40% to $1.1 billion. The revised plan excludes EU countries, except for the U.K., Ireland and Greece, which did not object.

European bonds that are trading are little changed, holding onto last week's gains, which pushed yields to near two-week lows.

British bonds, or gilts, were particularly boosted by the downward revision to first-quarter GDP, which erased the 0.1% growth previously reported. The U.K. economy's expansion ground to a halt in the first quarter, the first time since the end of the last recession in the second quarter of 1992 that no growth was reported. The downward revision to the earlier estimate reflected mostly the reduced output from the service sector. The news helps encourage hopes that the

Bank of England

will cut rates again when it meets in early June. There is scope for the September short-sterling futures contract to extend its recent gains toward 95.00 from the current 94.80-94.82 area.

Sterling itself is trading near its lowest levels against the dollar in nearly seven weeks.

It briefly slipped below the $1.60 level for the first time since early April. But its downside momentum appears to be easing, leaving the market vulnerable to a bit of a short squeeze.

Meanwhile, the dollar continues to straddle the 124-yen level

-- though with senior Japanese officials warning they are closely watching the foreign exchange market, traders need more incentives to probe the dollar's upside. The euro has steadied but is hovering within spitting distance of its record lows. Chart-based resistance is seen near $1.0620. Yen and commodity price weakness has finally taken its toll on the Australian dollar, which was sold to three-week lows. Before the weekend, the Australian dollar nicked the $0.6650 level before falling off to post a bearish outside down day. Near-term potential extends toward $0.6500.

The CRB index fell last Friday to extend its losing streak to six consecutive sessions. It begins this week at its lowest level since April 27 and is some 2.8% off the high set earlier this month. There has been much talk in the media about how central banks and the IMF are manipulating gold prices. This is silly. When central banks buried nearly a decade worth of new supply in their vaults, few argued that they were artificially bolstering the price. Gold has long been a market that government decisions played a key role.

Previously I suggested that Federal Reserve chairman's comments about the U.S. trade balance reflected old worldly thinking. To this I would add his views of gold. He argues that in extremis, gold is better than fiat or paper money. This is true by definition. But it is also true that

Lucky Strike

cigarettes were used instead of paper money in occupied Germany at the end of WWII, and yet we do not attribute special monetary significance to cigarettes. In extremis, we are reduced to barter as illustrated by the countries without hard currency. It wasn't that long ago, to cite one example, the Russia traded vodka and ships for Western soft drinks.

Lastly, worries that Argentina will break its eight-year peg to the dollar continue, with effects on regional markets.

George Soros'

claim before the weekend that the Argentine peso is overvalued and the price to be paid for it is a recession belabors the obvious. He is not talking his book as much as stating economic fact. Indeed, a devaluation of the peso and the global ramifications would likely exacerbate his funds' poor performance this year.

The peso is indeed overvalued by most economic measures.

However, its overvaluation arguably performs important economic functions, like curbing domestic inflation, and providing businesses power incentives to modernize and become more competitive. If the currency cannot adjust to the various economic pressures, the burden falls to the real economy. In April industrial production fell for the eighth consecutive month on a year-over-year basis. A recession may be preferable to a return to hyperinflation and instability of bygone days.

There is no proof that had Argentina dollarized its economy its current woes could have been avoided. Low commodity prices and a recession and devaluation in Brazil, which buys a third of Argentina's exports, would have taken their toll. Nor would it make up for the lack of political will to take great belt-tightening measures. Expect if push comes to shove, the peg holds. Argentina is no Brazil. Argentina is no Russia. Argentina in some respects is more like Hong Kong.

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