It continues to be a source of great wonder for us that investors feel so optimistic about a US recovery despite the continued poor performance of the underlying economy. Consumer confidence has been highlighted as the source of renewed growth, while our view has been that consumer confidence alone is not enough. The least we have been looking for is renewed industrial growth and profits. Better still, we would like to see a rebalancing of the US economy both internally (private expenditure vs. earnings, sensible stock valuations) and externally (the balance of trade and the strength of the dollar). It looks like we are asking for the moon on the rebalancing, but we remain stubborn about underlying economic activity needing to expand. Last week we pointed out that 2002 is forecast to see a lower US GDP growth than even this year. Now the OECD has "officialised" that forecast. Earnings growth and GDP stagnation are very bad bedfellows.

The continued spending rate and high confidence of the US consumer is itself a wonder. There has however been slippage this week. The latest survey of confidence has given the worst results since February 1994. Many commentators are now writing publicly that the tech rally is ahead of itself. Some are even alluding to a "second bubble". The dollar has now backed off its recent highs, reflecting the sense of doubt that all is not so well as Paul O'Neill and others are telling us. That said, there is still no denying the stock rally and bond decline that have taken place. The recent trends are real enough, but it is legitimate to doubt whether the foundation for further stock gains and bond declines is there.

Despite the contradictory and frankly propagandist statements of American officials, we still expect a further cut in the Fed rate, but cannot imagine it going below 1.5%. The amount of corporate bonds on issue and in the pipeline is another signal that interest rates are near (but not yet at) their bottom. For maturities, we believe that an average of 5 years, as suggested last week is fine, but in the context of continued shortening. So much depends on whether and when "traction" is achieved, and it is not there yet!

We have written little of Japan in recent weeks, because no progress was apparent. It is the one country where bad news, like today's further downgrading by S&P, can be good. This is because only by passing through increased unemployment, a lower yen and inflation can this country recover and play its positive role in the world economy. The news this week is of a lower yen, some privatisation and disenchantment of insurance companies with the stock exchange (how long does it take?), are all small but positive steps.

Two emerging markets are in great contrast at present: Russia, with its improving credit rating and every sign of economic and political progress, and Argentina where expectations could scarcely be worse. We have been debating whether Argentina could be like Russia after the latter's bond collapse three years ago. Those who bought Russian bonds at their lows, or even recently, have done very well (even to the point where some profit taking might be in order). The Argentinean bond exchange programme is now underway, with November 29th the deadline with JP Morgan for foreign bondholders who wish to participate in the exchange. However, we can see no reason to accept. Our strong recommendation for foreign holders of Argentinean bonds is to sell them without further delay. Argentina appears to have condemned itself to a lasting recession until it unhooks its currency.

Nearer to home, we note that Norwegian Government bonds are offering in the range 130 to 200 basis points spread (10 to 3 years) over their euro equivalents. The currency looks strong, although much will depend on future oil prices. It has been about two years since we last thought Norway worthy of consideration by bond investors, but the time has come to look again.

Interest rates in Switzerland may be expected to decline further, because the currency is so strong against the euro (and it may supposed that the CHF behaves in the "old-fashioned" way of falling when relative interest rates go down). In addition, the country is heading for recession while inflation is low. Switzerland's dependency on Germany as its trading partner is still very great, and the German economic news is grim.

In the debate of bonds in euros versus dollars, the exchange rate is the key issue. The recovery of the euro last night has given us some re-assurance in our confidence of a stronger euro when it becomes a real currency. In addition, so far as bondholders are concerned, the spread of Bunds over T-bonds has reversed (22 basis points higher yields of Bunds in early October, now 37 basis points higher for T-bonds - taken at ten years). It looks likely that bonds in euros will continue to outperform US bonds.

Recommended average maturity for bonds in each currency
Continue to shorten, especially in euros..

Worse than expected US consumer confidence numbers, positive talks about the euro by European officials, as well as equity markets beginning to give up some of the gains achieved since mid Sept, have combined to put the dollar under selling pressure.

EUR/USD: the euro is finding good support in the 0.8750/80 area, but needs to break its resistance at 0.8880 for a retest of 0.9010.

USD/CHF: the 1.6480 to 1.6530 area remains key. A weekly close above this level would lead to a retest of its resistance at 1.6750 to 1.6800, but only a close above this higher level would lead to further progress in the direction of 1.7000.

The downside remains open with 1.6380 and 1.6250 as the next key supports. Keep in mind that this currency pair remains extremely volatile, especially win the approach to thin pre Christmas markets

USD/JPY: despite the fact that the dollar managed to see a high of nearly 124.60, the US unit has come off quite substantially. A broad trading range is finding good support at 122.50 and 121.30, with the BoJ protecting the 120.00 area. It might be difficult to see the exchange rate moving above 125.50 in the short term.

EUR/JPY: A large trading band is developing in a 106.50 to 111.00 range. The downside here is also well protected by the BoJ.

USD/CAD: No change in our comment of last week: keep 50% of a long CAD position against USD established at 1.5990, double up at 1.6080 with a stop/loss at 1.6200. Short-term consolidation is under way in a range of 1.58 to 1.61.

AUD/USD: Same comment: the Aussie has created a solid base above 0.5000 and solid support comes in already at 0.5110. The topside should be limited to the 0.5280 to 0.5310 level.

GBP/CHF: Extreme volatility in this cross will continue. A broad trading band is developing in a 2.3100 to 2.4100 band.