Major Equity Markets Follow Yesterday's Climb on Wall Street

Plus, greater outflow in Brazil and more disappointing news from Japan.
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Major equity markets are higher following yesterday's advance on Wall Street.

The rally in share prices is pressuring bond markets, while the dollar is largely steady against the other leading currencies. China's officials continue their full-court press to convince the global markets that they will not devalue the yuan this year. A key barometer of devaluation fears -- the forward rates in Hong Kong -- remain near their recent peaks despite the denials and the rally in the

Hang Seng

.

Meanwhile, capital continues to flee Brazil. Preliminary figures indicate around $500 million left yesterday. This month's outflows have averaged around $450 million a day compared to $240 million a day in December and $107 million a day in November. Holders of Brazilian private-sector bonds that are maturing are not rolling the proceeds into new bonds, and this is adding to the capital outflows. Although the Brazil's congress continues to approve legislation that will reduce the budget deficit, many fear that the higher interest rates offset most, if not all, of new savings.

Trade issues are challenging emerging-market developments as the key focus in the capital markets.

The

Clinton

administration appears to be divided over whether to impose sanctions on Japan for its surge in steel imports to the U.S. The

Commerce Department

and the

Trade Representative

office have been most vocal in talking up the industry's complaints. On the other hand,

Treasury

Secretary

Rubin

appears to be leading the free-trade forces. Trade issues will come to a head tomorrow. The Commerce Department is slated to make its first release of steel import figures, which will now be a monthly event. The Trade Representative warns of strong U.S. action if Japanese steel exports to the U.S. did not fall sharply in December. U.S. figures indicate that Japanese steel exports to the U.S. fell by 6% in November. Japanese data, already available, suggest that Japanese steel exports to the U.S. fell 60% in December from the September peak.

With U.S. trade officials dusting off their retaliatory trade legislation, like Super-301, any reference to "voluntary" caps on Japan (or from Russia, Brazil and South Korea, for that matter) is disingenuous. The dollar has remained at the upper end of its recent trading range against the yen despite the more bellicose trade rhetoric. This may reflect the fact that the market does not expect the U.S. to use the dollar as a trade tool, especially with Rubin at the helm of the Treasury. Note that the

World Trade Organization

is expected to deliver its ruling on the U.S.-

EU

banana war tomorrow as well.

We have more disappointing news from Japan.

In a little-noticed report earlier this week, the

FSA

indicated that despite taking large write-offs, the 17 largest Japanese banks had nearly as many troubled loans in September 1998 as they did six months earlier. That means that very little progress was made in clearing the bad loan situation in the first half of Japan's fiscal year. For example, these 17 banks had 39.72 trillion yen in what are called "Category 2 loans," or potentially problematic loans, at the end of September 1998 compared to 40.20 trillion yen at the end of March 1998. Overall, loans in Categories 2 through 4 (Category 4 being unrecoverable loans) totaled 43.62 trillion yen in September compared to 45.18 trillion yen six months earlier.

Today, the

Financial Times

reports in its headline story that Japanese banks may be engaged in unorthodox and secretive trades, using loopholes in current regulations to conceal the magnitude of losses in the government bond market, where yields nearly tripled in the last two months of 1998. After yesterday's better-than-expected 10-year bond auction, Japanese government bonds retreated today. The yield on the benchmark #203 rose 9 basis points to 1.90% as the

Nikkei

edged higher to stand at its best level since mid-December.

Japan will release its December industrial production report tomorrow and is likely to post its first rise in three months. Japan will report its December retail sales tomorrow as well. News from Japan's consumers is not likely to be as constructive as factory output, and Japan will likely record its 20th decline there in the past 21 months. Department-store sales were off 5.5% in December, and general merchandise sales fell 2.2% on a year-over-year basis. December retail sales could be off as much as 4.5% to 5.0% compared to a 1.5% decline in November.

Germany's finance ministry has changed its tack, and reports suggest that it has dropped its push for reference ranges for the euro, dollar and yen.

Discussions of reference ranges or target zones had increased over the last several months after the Social Democrats were swept into power in Germany and after the turmoil in the global capital markets. The U.S. and the U.K. have been cool to such ideas, which emanate primarily from Germany, France and Japan. The change in tactics may be more pragmatic than ideological in nature. By dropping the call for reference ranges, which will appease the U.S. and U.K., Germany may be setting the stage for greater cooperation and coordination, which is the real goal.

Marc Chandler is an independent currency strategist whose column appears Mondays, Wednesdays and Fridays.