Weekly Update

It looks as though the much anticipated correction/consolidation is here. Global stock markets made a recovery high a few days ago and since then, they've faced some selling pressure. Now, we're aware that many people are waiting for a huge cataclysmic decline but so far this hasn't happened. On the contrary, global markets aren't declining by much and the more time passes by, the lesser the chances of a major crash. So, if the bear market is indeed alive and well, it is for the bears to prove. If stocks don't fall to a new low soon, the bulls will be proven right. Our view remains that there is an 80% probability that the bear-market is now over and we are in the early stages of a cyclical bull-market where prices could rise for 2-3 years.

Look; we don't believe that the global economy will suddenly jump back to life. However, as investors, we must keep in mind the gigantic policy stimulus which has been administered all over the world. Never before in history have we seen such a huge policy response. And it seems that the markets have already started to feel its effect. For instance, the 3-month LIBOR rate has now declined to 85bps, which means that banks are starting to lend to each other. Furthermore, credit spreads are narrowing and this is another positive development. Technically, the Volatility Index (VIX) has also declined to below 32 and over 36% of the stocks on the NYSE have climbed above their 200-day moving averages. Now, whether you believe in the 'Green Shoots' hype or not, the credit and stock markets are showing signs of improvement. Our expectation is that after a near-term correction, global stocks will resume their advance. So, we'd suggest you deploy additional capital during this pullback.

Commodity markets are mixed with some strength in the energy complex and choppy action in the metals. Crude oil is now trading just below $60 per barrel and we expect it to reach $70-75 with the rally in equities. As per our expectation, the price of natural gas has sprung back to life and we foresee further gains in the weeks ahead. Although there is plenty of supply at the moment, we expect natural gas production to fall towards the end of the year. Most gas companies have reduced their exploration & drilling activity and this should create supply problems in a few months time. So, we recommend that you maintain your exposure to the energy complex. As far as metals are concerned, gold is still trading below US$1,000 per ounce and it should stay subdued over the summer months. The yellow metal is likely to form an important low in July/August so wait before adding to your positions in bullion and the miners. A similar story should play out for silver - lows in the summer followed by a powerful rally.

Over in the bond market, US Treasuries have firmed somewhat and yields are starting to decline. After peaking at 3.29%, the 10-Year US Treasury yield has dropped back to 3.1% and the 30-Year US Treasury yield is currently sitting at 4.06%. As the stock/commodity markets correct over the following days, it is likely that the US government bond market will strengthen and this implies lower interest-rates. So, our near-term view on US government bonds is slightly positive at this point. Longer-term though, we expect a major decline in US Treasuries and a rise in yields.

Finally, in the currencies department, the US Dollar Index has broken below its March low and this is bearish. Furthermore, it seems as though the US Dollar Index has formed an important "head & shoulders" topping pattern, which means that the American currency should decline in the period ahead. Over the past few days, major world currencies have strengthened against the US Dollar and our preferred currencies have been the biggest beneficiaries. Both the Aussie and Canadian Dollars have appreciated sharply and they should rally some more against the world's reserve currency. So, keep your positions and buy more Aussie and Canadian Dollars on any near-term pullback.