Global Briefing: Rallies in Europe, Japan Lose Some Steam

The Nikkei opened with a bang but couldn't sustain it.
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Profit-taking pared initial gains in Japanese bonds and stocks, while European rate cuts triggered a strong advance in European asset markets. There has been little followthrough dollar buying after yesterday's advance, leaving the greenback in a consolidative mode.

Japanese markets opened with a bang. The


poked through the 17,000 level for the first time in more than a year, before profit-taking pressures emerged. Shares that have sharply run up recently, like some Internet issues and exporters, fell victim to the profit-taking. By most measures, the Nikkei is overextended, at least on a short-term basis. However, strong foreign demand, as well as ideas that many Japanese equities are relatively cheap compared to the U.S. market and several European indices, has blunted the corrective pressures. Today's close near the low end of the session's range, for the first time in several sessions, may signal further profit-taking early next week.

Japanese bonds consolidated their recent gains.

Initially the yield on the benchmark 10-year bond slipped to 1.555%, the lowest level since the end of last year. Nevertheless, despite the rinban operation (coupon pass), JGBs gave back their early gains. The 10-year bond yield finished the session 1.5 basis points higher than yesterday's close at 1.615%.

Japan holds a number of regional elections on Sunday, with the governor races in Tokyo and Osaka the most notable.

It appears that electoral rhetoric may have helped spark talk of another supplemental stimulus budget. While one may indeed be forthcoming, it is three to six months too early to begin discussing it in earnest. It appears that many senior Japanese officials, including Finance Minister

Kiichi Miyazawa

, are currently opposed to new stimulus spending as unnecessary. In the near term, if further policy adjustments are required, look for it to take place on monetary policy rather than fiscal policy. The

Bank of Japan

left policy unchanged at today's board meeting.

It has become fashionable to talk about the excesses in Japan.

Taichi Sakaiya, the director of the


, said earlier in the week that three things remain in surplus in Japan: jobs, loans and capacity. But there is more to this than meets the eye. Consider Japanese banks. Reports suggest that the top 10 banks employ 124,000 workers.


, by comparison, employs 97,000. The top 10 Japanese banks have six times the assets of Citibank. The critical difference is on returns. According to a recent article in the

Financial Times

, Japanese banks have one-tenth the margin of U.S. banks.

In Europe, Denmark joined the rate cut bandwagon today by matching yesterday's 50-basis-point move in the ECB.

That means that in the past 24 hours, the U.K., the eurozone, Switzerland and Denmark have all cut rates. The interest-rate cuts have triggered a strong rally in European bonds and stocks. European bond yields have fallen around 10 basis points since yesterday's rate cut was announced. The benchmark 10-year German bund yield is at a two-month low near 3.81%. European equity indices opened sharply higher, but have since struggled to extend early gains. Near midday in London, most indices had seen their early gains cut nearly in half. Banks and telecommunications issues appeared to be leading the pack higher. The French


gapped higher into record territory. The U.K.'s


nudged into record territory as well.

It seems two developments took the market by surprise yesterday.



cut itself was not completely unexpected, but the magnitude of the move was. Even observers like me who correctly anticipated an ECB move were surprised by the size of the move. Rather than 20-25 basis points, the ECB cut by 50 basis points. The magnitude of the move is as unequivocal a signal as one could reasonably expect that, barring some significant deterioration in the eurozone economy, rates are at the bottom of the cycle.

The second surprise was the comments issued by

Wim Duisenberg

, head of the ECB. In particular, Duisenberg's double negative -- that ECB officials are "not dissatisfied" with the euro near $1.08 -- encouraged many foreign exchange participants to believe that the ECB would tolerate an even weaker euro. This, I think, is a bit exaggerated. Rather than send a signal to the foreign exchange market, Duisenberg's comments were meant to justify the rate cut. First, he acknowledged that growth prospects had dimmed, but after numerous ECB officials have warned that interest rates were not the barrier to growth, this was not in itself a satisfactory explanation.

So Duisenberg addressed other issues: He noted that in February money supply growth had partly reversed the acceleration seen in January. He also remarked that inflation expectations had fallen. His comment about the euro needs to be understood in this context. It was his admittedly awkward way of defending the rate cut by arguing, as he and others have done in the past, that the euro is not really weak. After all, it remains near where it was a year ago, when the participants of monetary union were formalized and their bilateral fixings agreed upon.

These two surprises seem to explain why the euro rally I anticipated failed to materialize.

I am nevertheless reluctant to give up the view. This said, the euro needs to prove itself, and this requires a convincing move above the $1.0850 area. Yesterday's euro selloff was not sufficient to push it to a new low for the week, and there has been no followthrough selling to speak of. Support for the euro is seen near $1.07. Ideally, for my preferred scenario, it would be constructive for the euro to finish today above last week's close of around $1.0785, around where it was trading earlier this morning.

Europe's interest-rate cuts were seized upon as an excuse to extend the rally in U.S. asset markets yesterday.

The June Treasury bond futures extended the rally seen since the softer-than-expected jobs data released a week ago. The secondary objective of 123-20 cited in this column

Monday still appears valid. If anything, the risk is that it was a bit conservative. Today's March

producer price report

may attract some attention, but barring a significant surprise, it's unlikely to have a sustained impact. The headline figure is expected to rise 0.2% to 0.3%, while the core rate (excluding food and energy) probably ticked up 0.1%. Next week brings a slew of data that will give the market better insight into the kind of momentum the U.S. economy enjoyed as the first quarter wound down.

Lastly, a word about China.

The real obstacle to China's


membership is the U.S.


. Significant factions in the Republican and Democratic parties are opposed. And no matter the magnitude of the economic concessions China made, they would not be sufficient. Nor does

President Clinton

have the political clout to force the issue. Sensing the lost cause, Clinton beat a tactical retreat, but did leave the door open to a possible agreement later this year. China seems to accept this for now. However, if it loses hope of joining the WTO, which is a proxy for greater economic integration in the world economy, its political calculations would change. In addition, the failure of China's premier,

Zhu Rongi

, to secure concessions from the U.S. would seem to put the economic reformists in China at a disadvantage in their own internal struggles.

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