U.S near term overview and the risks
The global financial market is in a crossroad since for last several months after a big rally since Sep 2010. There was a much expected pull back across major financial markets for almost all the financial asset classes.
Risk assets such as commodity experienced a substantial slump in last three months with the exception of Gold (of course, gold was off the new high as well but did suffered the least among major trading assets.)
The U.S economy is in a moderate recover with strong re-bounce from manufacture, IT spending and with a very sluggish recover on the housing sector. The current equity market sectors development did reflect the current weak housing market with the underperformance finance and housing sectors. However, with credit term easing and historically new low interest rates, the housing market may have a slow turn around this summer and will accelerate itself to next two years with job growth, low interest rate and much easier underwriting standards. If that happened, it would mean the economy recover will have a solid foot for the middle term. The sluggish housing market recover should warranty the low interest rates by Fed Reserve for an extended period, which will hurt U.S $ in the middle term.
U.S market Risks
The U.S., however is struggling with a debt ceiling lift political fight right now. Republics still strongly disapprove the debt ceiling lift without big concessions from the White House. Even the chance of U.S. default is very limited. The consequence of the U.S government default could mean the rewrite of global financial system rules and a financial crisis much bigger than 2008. This could be the biggest risk in today’s market. With this risk in place, currencies such as Euro and Gold, oil will have strong near term support. The next two months would be critical to watch this risk. Any major asset allocation should be delayed till the final compromise reached between the Republics and the Democrats
European Debt worries
The European market is still worrying about PIGS and especially Greeks debt restructure. As long as Spain and Italy government bonds are stable, we may Not see a market tsunami in the near term. However, any debt new rescue package of PIGS would give support on commodities especially the Gold.
Summary
My current market view is neutral in the near term on equity and commodities. However, I would still hold Gold portfolio to hedge any U.S and European debt risks. BTW, China only holds around $40 B gold in their 3 trillion foreign reserves. Chinese will buy into any dip to diversify their portfolio as well.
At this stage, I would buy some small to middle size fast growth tech sector firm because of the huge cash tech giants holds on right now. I would also buy dip commodity rich small/middle firms because Chinese sovereign fund and state run companies are actively looking for that.
I would also hold some cash to weather any possible headwind next two-three months. I have the faith on U.S could solve debt ceiling issues on time without hurt financial markets. But I will keep alert on the risk side as well.
One word for silver, silver is not in any major countries central bank reserve. It is much different than Gold.
