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Global Briefing: U.S. Selloff Stokes Broad-Based Retreat

There's one story in the markets: U.S. equities.

Yesterday's slide on Wall Street dragged global bourses lower, encouraging players to seek refuge in the fixed-income markets. Everything else seems like a footnote.

Japanese government bonds recovered from early losses after the 10-year bond auction was fairly well received. The bid-to-cover ratio of 2.16 was slightly below last month's 2.32, but the tail (the difference between the average and lowest yields at the auction) narrowed to 3 basis points from 6 basis points last time. The net result was that the yield on the old 10-year benchmark slipped 3.5 basis points to 1.315%. Elsewhere of note, a poor reception to Australia's government bond auction pushed its benchmark 10-year bond yield up 5 basis points to 5.91%.

Led by technology stocks and exporters, the Nikkei fell 1.1%, breaking a three-session advancing streak.



alone accounted for about a fifth of the decline in the index. Volume was relatively light. Initial estimates placed today's turnover below the six-month moving average for the second consecutive session. Reports suggest foreigners were early sellers. Other regional bourses were also lower, most falling 1%-3%. Korea, Malaysia and Indonesian markets managed to buck the overall trend and post advances.

There still is no convincing sign that the Japanese economy is on the mend.

News that sales at the large retailers rose 1.8% in April from March overstates the case. The monthly rise was not broad-based and seemed to reflect the depressed level of clothing sales in March and an increase in food and beverages. From year-ago levels, sales were off 4.8%. Meanwhile, Japanese businesses still lack pricing power. The government reported that its measure of corporate service prices fell 1.3% on a year-over-year basis in April, the 13th consecutive decline.

Major European bourses are 1.5%-2% lower.

Technology and telephone issues led the way lower. Of particular interest, intense price competition resulted in somewhat larger-than-expected fourth-quarter loss for

British Airways

(BAB) - Get Free Report

and the stock was punished. In local currency terms, the recent declines have put the Swiss stock index lower on the year and are threatening to do the same in Italy. In dollar terms, only the U.K. and Swedish markets are up on the year.

European bond yields are 1-3 basis point lower.

The benchmark 10-year German bund yield is off 2 basis points at 4.01%. Most 10-year yields are near two-week lows. But many fixed-income managers appear to be looking more favorably at intermediate sector issues. The short end is anchored by the low official money market rates, while the long end tends to be weighed down by the back-up in yields in the U.S.

European market participants are anxiously awaiting comments today from British Chancellor of the Exchequer

Gordon Brown

. At issue is the EU plan to levy a 20% tax on cross-border interest income earned by EU residents. This is part of the EU's attempt to close tax loopholes. Often investors in one EU country buy bonds in another country to avoid local taxes on the interest income. The U.K. has threatened to veto the measure, which requires unanimous support, because it threatens the large London market for international bonds.

British officials have made it clear that they are not ready to offer an alternative that would protect their international bond market, but many EU officials hope that some direction is signaled that would break the logjam. As the measure is currently drafted, non-EU investors and EU institutions like pension funds would be exempt. The goal is really to target individual tax dodgers who hold an estimated 10% of the outstanding issues.

Meanwhile, the prospect in the U.S. of a Financial Accounting Standards Board ruling could discourage U.S. companies from issuing foreign currency-denominated bonds. The rule, which won't be implemented for another year, will require companies to report losses on derivatives in their earnings statements. The rule covers derivatives that are used to hedge a company's currency risk on foreign bond sales. Often, companies that issue bonds denominated in foreign currencies use derivative products like swaps to protect themselves from adverse currency moves that would have the net effect of increasing the cost of repaying the debt.

Under these rules, the accounting treatment of foreign currency derivatives will be out of sync with the treatment of the bonds themselves, and this could result in more volatile swings in earnings. To avoid this risk, many companies may minimize their foreign currency borrowings.

Meanwhile, the dollar has fallen victim to a bout of profit-taking.

The dollar has suffered its largest decline against the yen in nearly a month. The move began in earnest yesterday and has continued today. The greenback's upside momentum had begun fading at the end of last week, as warned here on May 21. However, the weekly close at 124.01 yen was sufficiently ambiguous to encourage players one final test of the dollar's upside, which faltered yesterday in front of 124.50-yen area. Look for the dollar to trade in a range of 122.30 to 123.30 yen, with the breakout pointing the direction of the next yen move.

With the dollar falling so quickly against the yen, short-term players bought back previously sold euro positions as well.

Thus far, chart-based resistance near $1.0650 has stalled the short squeeze. Additional resistance is seen near $1.0680.

For the record, a Finnish central bank governor confirmed that, contrary to speculation by foreign exchange commentators, the

European Central Bank

has not intervened to date to support the euro, nor have there been proposals to do so. Without continued hemorrhaging of the U.S. equity market today, or fresh excuses to sell dollars, look for this general area to hold. The market will be trying to digest the dollar implications of a press report warning that some Republican senators may try to block the confirmation of Treasury Secretary-designate

Larry Summers

in exchange for some political advantage or concession. My sense is that the story is a dead end and that Summers will be easily confirmed.

Sterling has stabilized around the $1.60 area.

A couple of members of the

Bank of England's

policymaking committee expressed concern about sterling being too strong yesterday and more MPC officials will testify before parliament today.

However, let's be clear. The reason the pound is relatively strong has little to do with the intention of British monetary officials or with its level not being optimal for the economy. The attractiveness of U.K. asset markets, stocks, bonds and real estate, the fact that it provides an alternative to eurozone investment, its relatively high yields, and some optimism that the U.K. economy will recover before the Continent, all have helped bolster the pound. In addition, at least until very recently, sterling traded like a dollar bloc currency more than a European currency. As suggested here yesterday, sterling's downside momentum has faltered. Look for a move toward $1.6050-$1.6100 over the next couple of sessions.

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

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