Moving to defensive sectors

Economics

This week we expect US consumer and producer prices to rise on the back of higher energy prices. Industrial production probably showed solid growth in line with robust manufacturing surveys.

Eurozone industrial production should also have expanded in April in line with business surveys. Inflation for May should be confirmed at 2.5% yoy, driven by higher energy prices. In Japan no changes are expected from the Bank of Japan's monetary policy.

Foreign exchange

The euro is close to testing its long term support line at 1.1880. This level needs to hold to keep the long term uptrend intact.

The dollar/yen should rise further, with 112.00 & 115.00 as next resistance levels. It should remain above 108.65 to keep this bullish outlook valid.

Fixed income

Yield curves were quite stable over the week both in Europe and the United-States. Comments by central bank committee members both in the United-States (Greenspan) and Europe (Noyer) regarding concerns about rising inflation pressure put only temporary pressure on the markets.

This week in the US and Europe we expect strong economic data such as industrial production together with increasing inflation to put upward pressure on yields. We expect this rise to be quite moderate, however, given current levels.

Equities

The lack of market moving economic figures and unexpected comments from Alan Greenspan kept investors at the sidelines. We prefer to stick to our strategic scenario of gradually moving away from high beta and cyclical stocks into the more defensive sectors.

In a first phase we would propose to look at consumer staples and telecom and in a second phase we would shift towards health care. Regarding technical analysis, the S&P 500 currently trades at crucial levels. Prices ran up to the critical level at 1,145.

In order to remain bullish on the outlook, the index should show closing prices above 1,145 at the start of the week. Closing prices below 1,130 will signal danger. The DJ EuroStoxx 50 fluctuated at critical levels. Closing prices above 2,830 are a necessity to keep a bullish outlook.