Global Briefing: Profit Concerns Weigh on Sentiment

The prospect of yen strength weighs on Treasuries.
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Global equity markets are mostly lower as profit concerns weigh on sentiment. Debt markets are faring a bit better but are generally treading water. The dollar is heavier, slipping to two-week lows against the Japanese yen and the British pound sterling.

A local press report warning that Japanese life insurers may reduce their purchases of foreign bonds this year is weighing on U.S. Treasury prices in light overnight turnover. The report suggests that the five major life insurers could cut their combined budget for overseas fixed-income investments by as much as 50% from last year 1.8 trillion yen. One of the chief concerns is that the yen may strengthen over the course of the year. The foreign-exchange component is the key to total return on foreign fixed-income investments. Academic studies suggest the currency component accounts for as much as 60% of the variability returns of a global bond portfolio.

Treasuries may also be weighed down today by supply concerns.

U.S. corporates and agencies are reportedly preparing to sell $9 billion of bonds over the coming days. Often underwriters sell U.S. Treasuries as a hedge.

Some investors may also be concerned about the rising costs of the war in the Balkans.


officials have estimated that the conflict could cost $4 billion if the conflict lasts through Sept. 30, the end of the U.S. fiscal year. About a quarter of this will be used to replace ammunition. Pentagon officials did not indicate whether this will entail replacing the precision guided missiles or older weapons.

Partly offsetting these concerns was news from the American Petroleum Institute

that U.S. oil and gasoline inventories unexpectedly rose. It is the first rise in gasoline inventories in five weeks, reflecting a decline in demand and an increase in production.

European bonds are little changed and yields continue to hover around four-month lows. Japanese bonds fell for the second consecutive session amid continued talk that the economy will require additional stimulus and that current yields are too low to attract strong participation in next week's 10-year bond sale. The yield on Japan's 10-year benchmark bond rose 5 basis points to 1.65%. Japan's Finance Minister Kiichi Miyazawa warned that the economy may not recover much in the first half of the fiscal year that began this month. Although he continues to deny the need for an additional economic stimulus, others are not as sanguine.

Foreigners in particular still can't seem to buy enough Japanese stocks.

After spending most of the session in negative territory, the


managed to eke out gains on the back of what reports suggest were buy programs from foreign brokerage firms. Large-cap issues are among the foreigners' favorites. Also, news that the LDP will not endorse the Ministry of Health's proposal to cap prescription prices subsidized by medical insurance helped lift pharmaceutical shares. The


subindex for pharmaceutical companies rose 2.9%.

European stocks are not faring as well, with most major indices down 0.6%-1%.

The recent news from





(INTC) - Get Report

appear to be weighing on technology issues specifically and raising profit concerns in general.

Germany reported somewhat weaker-than-expected retail sales in February. The


seasonally and inflation-adjusted time series, which includes autos, gasoline and discount warehouse sales, fell 1.9% in February from January and were off 1.5% year over year. The Federal Statistics Office calculation, which does not include these items, fell 3% in February. Weakness was seen in clothing, furniture and household goods. Looking ahead, the early Easter, improvement in some sentiment indicators and favorable wage settlements and tax changes should help boost retail sales in March and April.

The German data stand in stark contrast to the U.S. retail sales figures released yesterday.

Although the March data were a bit softer than expected, it was more than offset by the substantial upward revisions for back months, especially in February, where retail sales figures were revised from 0.9% to 1.7%. U.S. retail sales, which account for around 40% of personal consumption, which itself accounts for nearly two-thirds of GDP, rose a mind-numbing 14.9% annual rate in the first quarter.

Although U.S. and German growth differentials probably peaked in the fourth quarter when the German economy contracted and the U.S. expanded at around a 6% clip, the ongoing contrast is one of the key forces that continue to support the dollar.

Yet on the day, the dollar is struggling.

It is flirting with its uptrend against the yen that has been in place since the start of the year. It has been successfully tested three or four times. A convincing break, say, of the 118.80-yen level could signal another 1% dollar decline. In the options market, yen calls are selling at a premium to equidistant yen puts, suggesting the market's bias is indeed for further yen gains. It seems that only the fear of intervention is keeping speculators from getting too aggressive. The Ministry of Finance's Haruhiko Kuroda continues to warn against excessive movement of the yen and implicitly is threatening intervention. The BOJ's hand has not been seen since the dollar slipped below the 110-yen level at the start of the year.

The euro has edged higher against the dollar, but key resistance near the $1.0850-$1.0870 area remains intact.

Fear that the war in the Balkans may spread or intensify seems to prevent speculators from moving back into the euro, which has generally trended lower since its birth at the start of the year. Support is seen near $1.0760. In the options markets, the fact that euro puts sell for a slight premium to calls the same distance away from current spot prices warns that my scenario of a more sustained bounce in the euro may still be premature.

Meanwhile the British pound is trading at its best level against the dollar in two weeks.

Market sentiment toward the U.K. appears to be improving. There is growing talk that the

Bank of England

, which has reduced rates six times since last fall, may stay on hold for several months. There is also talk that economists may revise upward first-quarter GDP forecasts. Sterling faces its first real obstacle near $1.6230 area, nearly a half a cent above current levels.

Lastly, the Canadian dollar is at its best level against the U.S. dollar since the middle of February. Ideas that the

Bank of Canada

could take advantage of further Canadian dollar strength to reduce interest rates may curb speculative interest in the near term. Initial support for the U.S. dollar is seen near the 1.4850-1.4875 level against the Canadian dollar. Canada is set to release March inflation figures next Wednesday. Inflation is bound to stay below or at least in the lower end of the BOC's 1%-3% target range.

Marc Chandler is an independent global markets strategist who writes daily for At the time of publication, he was long Intel and U.S. bonds, though positions may change at any time. While he cannot provide investment advice or recommendations, he invites you to comment on his column at