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Global Briefing: U.S. Recovery Pushes Stocks, Bonds Higher

The issue of yen weakness resurfaces in Japan.

Stock and bond markets are higher following yesterday's recovery in U.S. markets. Local developments also are underpinning the advances. The dollar is stronger against the yen and major European currencies.

Japanese markets began the session on a weak note, with the


slipping below 16,000 for the first time in seven weeks. Japanese bonds came under early pressure after the

Ministry of Finance

warned that interest rates may rise and threaten the recovery if the government borrows more money to pay for additional programs to boost growth. The bond market recovered late, with the benchmark 10-year yield falling 2 basis points to 1.305% after the

Bank of Japan's

generous provisions of liquidity pushed investors further out the curve. The yield on three-month certificates of deposit, a money-market benchmark, fell to a record low of 0.03%, matching the overnight call rate.

The Nikkei finished with a gain of about 0.5%

, posting its first advance in six sessions. Foreigners were reportedly early sellers for the second consecutive session. Japanese exporters and multinationals were boosted by the yen's weakness.





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were among the leaders. Pharmaceutical companies also helped lift the overall market. Earnings in this sector are one of the few bright spots.

Japanese officials declined to comment on rumors that they were prepared to accept a weaker yen. A number of officials, including

Eisuke Sakakibara


Haruhiko Kurodo

, indicated they were watching the foreign-exchange market closely. Bank of Japan Governor Masatu Hayami called for foreign-exchange stability. On balance, the market was reluctant to extend yesterday's dollar gains against the yen. The dollar has been largely confined to a 115-125 yen trading range for the better part of the last eight months.

But to go from this observation to claim that Japanese officials have sanctioned this range requires several dubious assumptions. For example, such a leap assumes that Japanese officials have that kind of control over the foreign-exchange market, something they surely failed to demonstrate in the previous 10 months, which saw several rounds of intervention. It also requires a theory of foreign-exchange movement that gives a privileged place to wishes and intentions of policymakers rather than economic fundamentals and supply-and-demand functions. It also assumes a level of micromanagement of currency prices that seems too narrow from a policymaker point of view. The 115-125 range is tantamount to a little more than a 4% band on either side of the 120-yen level.

Other Asian bourses were mixed.

Of particular interest, South Korea reported its economy expanded a stronger-than-expected 4.6% in the first quarter. This marks the first quarterly growth since the


program in late 1997. Economic strength was broad-based, with manufacturing output up 10.7% and private-sector consumption up 6.3%. The rebound in the economy is also easing the unemployment problem, as joblessness fell in April. Challenges, of course, remain; Korea is no Nirvana. Corporate reform and restructuring need to be further implemented. Yen weakness also poses a challenge for Korean producers. The 3.6% slide in the Korean equity market was partly attributed to weakness in exporter shares.

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If parts of Asia can recover while the Japanese economy remains moribund, the market is less convinced that the Europe's economy can recover without the participation of Germany. Today's news from Germany was disappointing. The IFO survey of business sentiment unexpectedly fell in April to 89.7 from 90.2. The consensus had looked for a rise as large as that. The


monthly report seemed to confirm what has become apparent: The economy has yet to recover from the slowdown. The Bundesbank also warned that the budget deficit is unlikely to narrow much this year. It attributed this less to the poor growth prospects and more to increased public spending. Some press reports suggest the German cabinet was skeptical of Finance Minister

Hans Eichel's

plan to cut 30 billion marks from next year's budget.

News from Italy, Europe's second-largest economy, was not much better. Industrial orders fell 9.4% in February from year-ago levels, marking the sixth consecutive monthly decline. The consensus had called for only a 2% decline. The U.K., Europe's third-largest economy, reported a larger-than-expected decline in retail sales in April. Weaker clothing and department-store sales were the chief culprits behind the second decline in three months. The 0.5% decline in April retail sales was only partly offset by the upward revision in the March series gain to 0.6% from 0.4%.

European bonds extended their earlier gains on the news.

They were already underpinned by yesterday's rally in the U.S. Treasury market, its biggest single-day rise in nearly 2 1/2 months. The

European Central Bank

meets today, but no one is expecting a change in policy. European equities were also posting modest gains, but off their highs in late morning turnover. Telephone and computer issues were generally higher amid hopes of profit growth and merger activity. Bank shares were boosted by news that


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would cut its British workforce by 10% as part of a restructuring.

The U.S. reports its March trade balance today,

rather than yesterday, as this space reported in error. The analysis represented is still valid. The trade deficit is a sign of the vibrancy of the U.S. economy, not a sign of its weakness, and surely not something that will derail the dollar's strength on a trend basis. On a different front, note that the September fed funds futures contract has now fully discounted a 25-basis-point hike by the

Federal Reserve

. The July contract, which offers the best insight into next month's meeting, has about 15 of the 25 basis points priced in -- or, to say the same thing, assesses about a 60% chance the Fed will raise rates at the next FOMC meeting.

Brazil's central bank slashed overnight rates late yesterday to 23.5% from 27%

. It is the seventh cut since March and the overnight rate now stands at its lowest level in eight months. The overnight rate peaked in January at 45%. The decision follows news of a sharp drop in price pressures. For the 30 days ended May 14, consumer prices rose 0.12%, compared to a 0.4% rise in the previous 30-day period. On the other hand, the markets did not like yesterday's news that President

Henrique Cardozo

appeared to back away from plans to raise the minimum retirement age for nongovernment employees. The markets fear that as Brazil's (and other countries, for that matter) economy recovers, it will make policymakers less willing to proceed with the difficult reforms that are necessary.

Lastly, rumors that Argentina is considering breaking its eight-year peg to the U.S. dollar were officially denied. However, money-market rates rose yesterday for the seventh consecutive session and now stand at 15-week highs. An op-ed piece earlier in the week by former Argentine Finance Minister

Domingo Cavallo

appeared to spark the speculation that the peg may break. Cavallo was one of the key architects of Argentina's currency board.

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