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Global Briefing: Peace Rumors Lift Euro

But the European currency has since given back much of its gain.

Global asset markets are mixed today.

No overall themes are apparent, except in the currency market, where the dollar is firmer as it has become clearer


is pressing ahead with its air campaign against Yugoslav forces.

Yesterday, a local newswire reported that Yugoslav troops had begun a partial pullback and as the world's newswires repeated the story, the euro bounced almost a cent against the dollar. U.S., U.K. and German officials quickly made it clear that even if the report was true, which they could not confirm, it was insufficient to signal an end to the bombing. The euro has given back about half of its gains scored on the initial news.

It is the second time in as many weeks that rumors of peace helped lift the euro

, only to have hopes dashed as it became clear that the hostilities would continue. Both times the euro popped up into the $1.0820-$1.0830 area. This area needs to be convincingly taken out to signal a further correction to the euro's four-month-old downtrend.

When NATO bombings began, the euro was trading near $1.0960. On the other hand, the euro appears to have put in a double top against the dollar. A break of the $1.07 area would confirm this and signal a move back toward the $1.06 level, which is my preferred scenario. Note that a religious holiday in Catholic parts of Europe will close some markets on Thursday and this, coupled with the ongoing hostilities, may discourage aggressive position-taking.

Meanwhile, Japan successfully sold 1 trillion yen of six-year bonds at an average yield of 0.756%.

The bid-to-cover ratio was 1.92. The yield on the government's benchmark 10-year bond slipped 2.5 basis points to 1.355%. Finance Minister

Kiichi Miyazawa

indicated that a reassessment of the Japanese economy would take place at the end of summer and that there were no specific plans for an extra budget. He also denied that Japan would follow the U.K. (and other central banks) in reducing its gold reserves.

The Nikkei fell 1.4%, led by bank shares.

Reports suggest that Japanese life insurance companies were the featured sellers of bank stocks, which had rallied more than 40% this year. The rally itself had been attributed partly to short-covering by hedge funds. Life insurance companies are coming under the scrutiny of the

Financial Supervisory Agency

and this is encouraging the companies to strengthen their balance sheets and take profits on some of their riskier assets, according to reports.

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The outlook for Japan's five largest chipmakers appears to be deteriorating.

They have not recorded a profit for the past two years and more of the same is expected this year.

Daiwa Research

estimates that the cost of production for the 64-megabit dynamic random access memory chip for the big five Japanese producers ranges from $8.50-$9. This compares unfavorably, for example, with

Micron Technology's

$6.50-$7 cost and the $5.50 a chip reached by some Taiwanese producers.

Other Asian bourses were mixed.

Of note, Australian mining companies remain under pressure following the U.K.'s surprise gold sale announcement last week. Korea's equity market fell for the first time in six sessions, partly on profit-taking and partly amid concern that


will dilute its earnings by issuing new shares in both locally and globally.

European equities are narrowly mixed and the bonds are little changed.

They are positioned to follow any strong leads by the U.S. markets today. Equities seem driven today by earnings or expected earnings reports. This is tending to lift utility shares and depress chemical issues.

Germany's trade surplus was little changed in March

, but exports rose for the first time this year. The March surplus stood at 11.1 billion marks compared to an 11.5 billion marks in February. That puts the first-quarter surplus at 31.3 billion marks, compared with 28.1 billion marks in the year-ago first quarter.

Exports rose 0.6%, but the reaction to the news was blunted by a report last week that showed foreign manufacturing orders, a leading indicator of German exports, fell 3% in March. The 1.8% rise in German imports largely reflected higher import prices. Not only did energy prices rise sharply in March, but the euro also fell, making imports even more expensive.

Providing more evidence that its manufacturing sector may be recovering, the U.K. reported stronger-than-expected industrial production data for March. Industrial production, which includes manufacturing, utility and mining output, rose 0.2% in March, better than the consensus expectation for a 0.1% decline. Manufacturing output rose 0.3%, its best showing since last June and easily beating expectations of a 0.1% rise.

The stronger-than-expected data did not alter perceptions that the Bank of England may still have to reduce rates.

Short-sterling futures contracts (futures on three-month deposits, like the U.S. eurodollar futures contracts) were steady to higher. The key to U.K. rate expectations is not so much tied right now to the economy as to the strength of sterling.

Last week, the Bank of England warned that if the pound remains strong, inflation is likely to undershoot the government's target. This implied that the BOE would consider cutting rates to sap some of sterling's strength.

Last week's rogue rumors that Greece was trying to expedite its entry into European monetary union made for extremely volatile trading in Greek asset and currency markets. The kernel of truth in the rumors, it appears, is that the war in Yugoslavia may encourage other EMU nations to soften the requirements for its entry. Greece hopes to join monetary union in 2001 -- before the euro notes and coins go into circulation. After an EU finance ministers meeting yesterday, the Belgian minister suggested some allowance should be made for Greece if the war in Kosovo hampers its efforts to converge with the eurozone.

Two other comments from officials at that meeting are worth mentioning.

First, German Finance Minister Hans Eichel said the euro's "present trend does not require any particular measures." This is further confirmation that speculation that the European Central Bank had intervened to support the euro was groundless, as suggested in this space yesterday. Second, Italy's Treasury Minister Carlo Ciampi expressed doubts over an economic recovery in the eurozone that officials currently expect in the second half. He acknowledged that the balance of risks remain on the downside.

Lastly, the downside pressure on U.S. bond futures may be easing.

The June bond contract recovered after slipping to new lows yesterday. This was sufficient to signal a minor bullish divergence on some momentum indicators. Following this week's Treasury refunding, at which no 30-year bonds are being sold, U.S. bonds are thought to enter a more favorable seasonal period.

Also, after pricing in a concession ahead of the refunding, bonds frequently rally afterward. This time, dealers may wait until after the PPI and CPI reports on Thursday and Friday to buy back the Treasuries they previously sold. Expectations generally are for a 0.3%-0.4% rise in the headline figures, but for a subdued core rate, when food and energy are excluded. My first target on the upside is just below the 120 level basis the June contract.

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, although holdings can change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at