Global Briefing: Tracing the Cyclical Shift Across the Globe

Steel and paper stocks have rallied in Japan just as in the U.S.
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The Japan's Nikkei managed to extended its advance, but European bourses are failing to retain their opening gains. Global bond markets are generally softer. The dollar is broadly mixed, with moderate losses against the yen and modest gains against most European currencies. The euro has been sold to new lows for its brief life.

Investors' shift toward cyclical stocks is not just a U.S. phenomenon, but rather appears to be global in nature. Steel and paper stocks in Japan, for example, are being seized upon as alternatives to high-tech issues.

Nippon Steel

plans to spend more to boost output by 10%, while



reportedly will cut its domestic capacity by 25% over the next five years to 1.5 million units. Press reports also indicate that it may not pay a dividend for the first time since it went public in 1951.

Japanese data confirm continued foreign demand for Japanese equities.

Foreigners have been net buyers of Japanese stocks for 12 consecutive weeks through April 9. In the week ended April 9, foreigners bought a net 292 billion yen ($2.46 billion). But foreigners are not the only buyers. Trading by individual Japanese investors accounted for 36.4% of equity transactions in the first week of April and, according to the

Nihon Keizai

newspaper, exceeded activity by foreigners for the first time in three years. Low interest rates appear to be helping to encourage investors look at equities over fixed-income instruments.

Japan's benchmark 10-year bond slipped lower

, with the yield rising about 2 basis points to 1.605%. There is some nervousness that yields may be too low to attract strong demand at next Wednesday's sale of 1.4 trillion yen of 10-year bonds. In addition, Finance Minister

Kiichi Miyazawa

indicated that government may have to consider additional tax cuts targeted for specific policy objectives.

On one hand, Miyazawa sounds optimistic that the Japanese economy will recover this year. He then undercuts that notion by suggesting additional tax cuts. The

Bank of Japan

is not as sanguine. Board member Kazuo Uedo warned that if private demand does not pick up, the Japanese economy may contract again this year. In this context, Japan reported that Tokyo department store sales fell 8.5% on a year-over-year basis in March, the biggest decline in 12 months.

European bond yields are steady to slightly higher,

largely following U.S. Treasuries, while most equity markets have waded into negative territory after opening higher. Today's features include reports suggesting that

Deutsche Telekom

(DT) - Get Report

is in talks with Italy's largest telephone company,

Telcom Italia


, which is helping to lift share of most of the industry.


(PFE) - Get Report

, the world's fourth-largest drug maker, warned of disappointing profit growth in the second quarter, and this has weighed on the industry.

Meanwhile, the euro has slumped to new lows.

There are a few forces at work. First, there is a sense that Japan may recover before Europe. This is encouraging yen purchases against the complex of European currencies. Second, as mentioned

yesterday, some leveraged players appear to be switching from yen carry trades to using the Swiss franc as the financing currency. Third, many appear to be realizing that the war in the Balkans may last longer than many had previously been prepared to accept. This will likely hurt tourism this summer. Fourth, rumors that Russian Prime Minister

Yeugeny Primakov

may resign also appeared to weigh on the euro. Fifth, there are technical considerations, encouraging short-term operators to continue to view the euro's downside as the path of least resistance.

Since the euro has now fallen to new lows, it is helpful to look at something with a bit more history, like the old German mark. The dollar has been in a clear uptrend against the mark since late December. That trend line has been tested several times. Following last week's ECB rate cut, the dollar had flirted with penetrating that trend line. Along with others, I had expected that trend line to break. It didn't and istead of breaking down the dollar has broken higher. The dollar now appears to be poised to challenge its cyclical high set in August 1997 near 1.89 marks, which translates into about the $1.0340 level for the euro. The dollar's cyclical high against the Swiss franc was set last July near 1.5475. There will be increased talk of the dollar moving to parity with the euro (when 1 euro equals $1), but I suspect before this happens, European officials will try to obstruct the move either verbally or materially.

The implicit threat of intervention by the BOJ continues to curb more aggressive yen-buying

. The dollar fell to near 117.45 yen earlier today before bouncing back, mostly it seems on intervention fears. The next area of support is seen just below the 117-yen level, where the dollar bottomed around March 19-22. On the upside, a move above 119.20 is needed to suggest a near-term low is in place.

The strength of the Canadian and Australian dollars may in part reflect the same considerations that are helping fuel the sectoral rotation in the equity markets. The Canadian dollar is among the best performers against the U.S. dollar this year and is set to strengthen more. The Australian dollar is trading near eight-week highs. Foreign demand for Australian mining companies has been reported. Generally speaking, the market perceives both Canada and Australia to be commodity currencies. There is a significant difference between the two. Commodities and raw materials account for almost twice the share of Australian exports compared to Canada. Also, Canada is obviously much more integrated into the U.S. economy.

Canada's June Banker Acceptance futures contracts (essentially comparable to eurodollar futures) imply a yield of 4.56% vs the 4.75% overnight rate. This suggests that market has largely discounted a strong possibility that the

Bank of Canada

will deliver another rate cut. Next Wednesday Canada will report its March CPI figures, which are expected to show inflation remains below the government's 1%-3% band. The combination of low inflation and a strong currency is thought to give BOC the opportunity to reduce rates.

One of the more interesting currency strategies involves buying Canadian dollars for British pounds.

This trade was first

highlighted in this space on March 23 when the cross was trading near C$2.47 per pound. It is now near C$2.3950 and I suspect on its way toward C$2.30.

The U.S. reports housing starts/permits and industrial production figures today. The former is expected to continue to moderate, but remains at historically high levels. Industrial production is expected to match February's 0.2% rise. Capacity is growing faster than output, so the utilization rate may tick down.

While the data would generally be bond friendly, it is being mitigated by ideas that the manufacturing sector is on the mend,

as reflected by the Philly Fed index released yesterday and by supply considerations. In addition to the rash of U.S. corporate offerings, there has been a surge in international borrowings. Note that the first quarter saw a record $370 billion raised in the international bond market, an increase of 37% over the year-ago period. A break of yesterday's low on the June U.S. Treasury futures could fuel a slide toward 121 initially, but many will look for a retest on the lows for the month, which was recorded near 119-22.

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