Beyond the grief, the sympathy of all of us with the Americans, and the mourning, will be the recovery. Between now and then, however, lie many months of lost consumer confidence, economic turndown and further declines in stock markets. In a sense, this atrocity will accelerate what was being played out in slow motion. For over a year now, we have expressed the view that

• the US economy can properly recover only after rebalancing;
  
• that the US authorities attempts to maintain consumer spending despite the underlying lack of savings and the trade deficit are inappropriate;
• even if stock markets move up, the fundamentals (PEs and earnings growth) will mean an unsustainable recovery.

Now, there is likely to be a sense of getting the worst over and done with, the better placed to rebuild.

The reaction of the Americans over the coming months will be decisive as to the length of the downturn the world is now entering. If they are so demoralised that they retreat into economic and political isolationism, then the world will be in serious and long-term trouble. The terrorists will have won not just a battle, but a war. While recognising the risk of US isolationism, we firmly believe that the American fighting spirit will assert itself, and that the Americans will be determined to return to business as usual, not least to show that the terrorists cannot defeat them. Likewise, the sense of shared outrage throughout the world should increase the sense of solidarity against the common enemy. The leaders of the sole superpower have enormous responsibilities, and this tragedy can only encourage them to fulfil them still better. The world and its financial markets are resilient, and will return to normality quite quickly.

For fixed-income investors, all our usual conservatism of preferring sovereign and supranational bonds as the base of a portfolio is reinforced, as is our belief that risk is better taken in emerging market sovereign bonds than in corporates. As bond markets reopen, prices will, of course, be higher. Investors are seeking safety rather than yield.

Let us venture a comment on the dollar. It was declining anyway. We expect the euro to have a new lease of life, come January. Yesterday, which included a knee-jerk reaction into the Swiss Franc and gold, looks like accelerating the readjustment of the dollar that will let US industry regain its competitiveness and reduce the trade deficit. Yet, the dollar remains the preferred currency of trade and wealth accumulation. The correction is unlikely to exceed a few more percentage points. Paradoxically, the recovery has been brought closer, even if only because the down trend will be shorter and sharper rather than long and drawn out as it has been up to now.

The sense of "this makes everything move faster but in the same direction" applies also to interest rates. All Central Banks are already providing massive liquidity. Yield curves are moving lower over the entire range and steepening. We have already recommended investors to move to longer positions. They should remain long.

Recommended average maturity for bonds in each currency (changed 08 and 15.08).

No change to the long maturities we now recommend.

With all US markets closed yesterday and today after the horrific suicide attack by terrorists on US targets, all Central Banks world-wide are on alert. After heavy plunges again on all equity markets, the BoJ was the first CB to add extra liquidity into the system, warning that speculative attacks would be punished by intervention, even on a concerted basis. All CBs have made it very clear that they are going to add ample liquidity into the banking system. Equity markets will remain under pressure, and gradual shifts out of airlines-insurance and favouring defence stocks are likely, as well as a flight to quality, i.e. into cash, and government bonds, more in CHF and EUR then in USD.

There is no change as regards Japan: more and more capital flows are being detected being repatriated in the context of book closing at the end of September, and also covering losses on the Nikkei. Repeated verbal intervention by monetary officials to weaken the JPY remains ineffective for the moment. Only a rapid move below USD/JPY 118.00 might provoke the BoJ to step into the market.

EUR/USD: The 0.9000 remains the mid point for the time being. We expect the 0.8850-0.8900 area as very supportive and the euro should have the ability to seriously test the upside of the recent trading range at 0.9230/50, which needs to be broken on a weekly basis to make further progress. We rather opt for continuous range trading for the time being.

USD/CHF: 1.6800/1.6850 caps upside attempts for the time being, whereas 1.6400/30 remains very solid support. Only a loss of 1.6350 due to continued capital inflow might provoke an additional sell off down to 1.6150.

USD/JPY: Same comment: the verbal interventions by the Japanese have put a floor around 119.00 but sooner or later capital flows might provoke a test of the BoJ. Any loss of the support area at 118.00 should provoke a rapid move direction 115.00. USD/JPY 121.30 still acts as a major break out level on the topside with first target of 123.

EUR/JPY: Due to continued capital repatriation, this cross should remain in a large consolidation range of 105.50 to 111.--. A lasting strength of the JPY with levels below 106.- will provoke the BoJ, whereas levels above 110.- are still being used by Japanese exporters to sell the EUR/JPY.

USD/CAD: Any excessive weakness above 1.57 should be used to buy CAD for medium term purposes despite an old rule which says what is bad for the US is even worse for CAD. Monetary policy in Canada should give some support to the currency.

AUD/USD: Aussie should stay above its major support of 0.5050, as fear of RBA stepping into the market is real. Most likely range short term should be 0.5110 to 0.5290. Only a clear break above 0.5330 would open the door for 0.5410.

GBP/CHF: This cross will remain extremely volatile over the next couple of weeks. Higher oil prices and GBP as an alternative currency are giving some support to sterling, whereas safe haven buying of CHF in an uncertain market environment is favouring the Swiss Franc. 2.4700 to 2.4900 is a big resistance zone, which should hold. A downside break of 2.4100 should again open the door for 2.3850.