Fisher Capital Management: Government Bond Markets Global Outlook Fisher Capital Management Seoul

Government Bond Markets Global Outlook Fisher Capital Management Seoul - Conditions in the government bond markets have remained very difficult over the past month, and there have been further falls in some of the minor markets, especially in the euro-zone, because of continuing fears about sovereign debt defaults. The agreement reached by the member countries of the euro-zone to combine with the

IMF to provide any necessary support to enable Greece to refinance its maturing debts and avoid a default has had a poor response in the markets; but at least Greece has been able to make further bond issues; and the gilt edged market has coped fairly well so far with a disappointing Budget statement that has left any real attempt to resolve the serious UK debt problems until after the general election. But the sudden weakness in the world bond markets after a series of disappointing auctions has once again increased the tensions.

Our position remains unchanged; any existing exposure to bonds should be further reduced in favor of US & Euro equities.

Fisher Capital Management Seoul, South Korea - The global economic recovery is developing slowly, and so short-term interest rates

are likely to remain at low levels for a considerable period. It is also possible that

the “fudged” agreement amongst member countries of the euro-zone will provide

an opportunity for the introduction of the necessary austerity measures; and that

a new government will finally begin to address the debt problems in the UK. But

the risks in the situation are still increasing, sovereign debt defaults may still occur,

and the single currency system in the euro-zone may not be sustainable in its present

form. Higher bond yields therefore appear unavoidable; prospects for all the bond

markets are unattractive.

Developments in the bond market over the past month have clearly illustrated the

need for caution. The US economy continues to recover. The Fed has left shortterm

interest rates unchanged, and has indicated that they will remain “at exceptionally

low levels for an extended period”. This tended to enhance the “safe haven” status

of the US equity market for most of the past month, as conditions continued to

deteriorate in other bond markets.

Fisher Capital Management Seoul, South Korea - Most of the available evidence supports the view that the economic recovery is

continuing, but only at a slow pace. The unemployment rate remains close to 10%,

and the housing sector is still depressed, with both new housing starts and sales of

existing homes weakened still further by adverse weather conditions. However

retail sales are holding up fairly well, and manufacturers are beginning to increase

capital expenditures and inventories, and so there is a general expectation that

growth in the first quarter will be around a 2% annualized rate.

Fisher Capital Management Seoul, South Korea - The Fed has confirmed that its buying programmed for mortgage-backed securities

has ended, and that it may be moving slowly towards re-selling some of these

securities; but it seems to be in no hurry, and so both the economic background,

and the position of the central bank, remain broadly supportive.

The situation facing investors in the mainland European bond markets is more

serious. The economic background is improving, with the weaker euro providing

considerable support in export markets, and so the area continues to move out of

recession. But progress is slow, and so the European Central Bank is maintaining

very low short-term interest rates, and providing support. However the massive

fiscal deficits are threatening to overwhelm the bond markets and to lead to sovereign

debt defaults, and so investors have continued to switch from the bonds of the

weaker countries into those of the stronger countries, and have widened the yield

spreads across the markets. The latest Greek bond auctions have received only a

very moderate response, and there is considerable uncertainty whether even the

markets of the stronger countries are adequately discounting the risks in the situation.

Fisher Capital Management Seoul, South Korea - The available evidence on the performance of the euro-zone economy is mixed,

but slightly more encouraging. The weakness in domestic demand is continuing,

and retail sales volumes are disappointing in most member countries; but the

manufacturing sector, especially in Germany, is much more buoyant, with exports

providing most of the momentum. The latest Ifo index of business sentiment in

Germany is sharply higher, and other countries are also sharing in the improvement.

Analysts are therefore forecasting growth around the 0.5% level in the first quarter

of the year.

Fisher Capital Management: Government Bond Markets Global Outlook Part2

Fisher Capital Management: Government Bond Markets Global Outlook Part 2 - Our position remains unchanged; any existing exposure to bonds should be further reduced in favor of US & Euro equities.

The European Central Bank appears to share this view, although it has warned that the recovery “is likely to remain uneven”, and has kept short-term rates at very low levels. The bond markets have therefore continued to receive considerable support from the economic background and the actions of the central bank.

Fisher Capital Management Seoul, South Korea: However, these factors have been much less important than the fears about the debt problems in Greece and in other weaker members of the euro-zone. After considerable

prevarication, due primarily to strong German opposition to a bail-out; an agreement

has been reached amongst the member countries that, in conjunction with the IMF,

they will provide support for Greece if this becomes necessary to prevent a default

on its sovereign debts.

But the details of the agreement are very vague, and there is certainly no guarantee

that the country can carry out its promises to introduce significant reductions in

spending levels to reduce the size of its debts. The agreement has helped the country

to issue a further ¤5 billion bond; but it was forced to offer an interest rate of 5.9%

on a seven-year bond, 325 basis points above the equivalent German bund, and

that issue has subsequently moved to a substantial discount. Conditions have also

been made worse by the downgrade in Portugal’s credit rating, and so the pressures

on the bond markets are continuing.

Fisher Capital Management Seoul, South Korea: The gilt edged market has coped fairly well so far with the latest weakness in the

bond market, an inadequate response in the latest Budget to the debt problems in

the UK, and a warning from the Fitch rating agency that the government’s timetable

for reducing the fiscal deficit was “frankly too slow”, and that the country’s

credit rating was at risk. The economic recovery remains very slow, and the Bank

of England is holding short-term interest rates close to zero, so the market is

receiving some support; but in all the circumstances it is perhaps surprising that

it has managed to perform so well.

Fisher Capital Management Seoul, South Korea: The economic background in the UK remains depressed, but is slowly improving.

Retail sales bounced back strongly; the public sector continued its recruitment

programmed; and there has been a pickup in activity in both the manufacturing and

service sectors of the economy.

It was not surprising therefore that the Bank of England kept short-term interest

rates unchanged at the latest meeting of its Monetary Policy Committee and even

suggested that it would be prepared to reactivate its quantitative easing programmed

if this proved to be necessary. But this may not be enough to sustain gilt edged

prices at current levels.

Fisher Capital Management Seoul, South Korea: The latest Budget statement is forecasting a slightly lower fiscal deficit of £167 billion in the 2009/10 fiscal year, and a halving of the deficit by 2013/14; but there

is considerable skepticism in the markets about the growth assumptions underlying

the figures, and about the willingness of the politicians to address the real problems

involved in reducing the deficit. If there is no credible plan to achieve this reduction,

the country may well lose its AAA credit rating. Prospects have therefore become

even more uncertain, and a move to higher yield levels seems unavoidable.

Fisher Capital Management Seoul, South Korea: The Japanese bond market is slightly weaker over the past month. It is likely that this year, for the first time, bond issuance may provide greater support for the fiscal

deficit than tax revenues. This has already led to a downgrade on Japanese public

debt by Standard and Poor’s, and with new bond issuance this year estimated to

reach ¥44,300 billion, and to reach ¥55,300 billion by 2013, further downgrades

seem likely. Japanese institutional investors are used to financing massive deficits,

but it seems unlikely that deficits of this size can be adequately financed at present

yield levels. Prospects for the Japanese market therefore remain unattractive.

Fisher Capital Management- Financial Market August 2010

Fisher Capital Management- Financial Markets: Sentiment in the financial markets has improved

over the past month. The global economic recovery is continuing,

so far there have been no sovereign debt defaults, and there has

been a modest recovery in the euro. Investors and traders therefore

appear to have concluded that the gloom was overdone.

But there has been evidence of a worsening situation in Spain, and

the decision by the Chinese authorities to adopt a “more flexible”

towards renminbi has also raised some concerns about the growth

prospects for the Chinese economy.

Fisher Capital Management- Equity Markets: All the major equity markets, and the emerging

markets, have improved over the past month. Wall Street has outperformed

markets elsewhere because of some welcome economic

data; there have been strong gains in most of the mainland European

markets as the sovereign debt crisis has appeared to ease; the UK

market has welcomed the measures by the new coalition government

to address the problems of the huge UK fiscal deficit; and the

Japanese market has also moved slightly higher. Corporate results

have been satisfactory; and this has helped to improve sentiment

amongst investors.

Government Bond Markets have had another unusual month. The

sovereign debt crisis might have been expected to lead to a general

weakness in bond markets; but the main effect has been to produce

aggressive switching for the “weaker” markets to the “stronger”

ones, and a further widening of the yield curve.

As a result the major markets are unchanged or only slightly lower

at a time when the “weaker” markets, especially in Southern Europe,

have continued their sharp declines. Slow economic growth and

low short-term interest rates are continuing to provide support.

Currencies: The improvement in sentiment in the markets has led

to a movement of funds out of the “safe havens” of the dollar and

the yen into commodity-related currencies and “riskier” assets.

Both the dollar and the yen are therefore slightly weaker over the

month; and this movement has also eased some of the pressure on

the euro, and allowed it to recover.

Sterling has also improved as the markets have welcomed the

measures introduced by the new UK government to reduce the

fiscal deficit.

Fisher Capital Management- Shrt-Term Interest Rates: There have been no changes in shortterm

interest rates over the past month in the major financial

markets.

Fisher Capital Management- Commodity markets: have produced a mixed performance over the

past month, with some weakness in base metal prices, but strong

gains in the prices of cocoa, coffee, oil and precious metals.