Second quarter reviewed with a look at the third

Let`s first recap on two weeks of a bombardment of figures from the US. On 24 June we saw lower durable goods orders but higher new home sales figures. The very next day, first quarter gross domestic product figures were revised downwards by 50 bases points but consumer confidence was up. Then on the 30th of the month, the US Federal Reserve raised interest rates by an expected quarter percent. Friday, 2 July was the cherry on the top with non-farm payroll figures coming in at half of what was expected.

What does this mean? In short, it means the US economy is not expanding as fast as expected. In fact, the economy is slowing, and not creating much-needed jobs. It also means the US has turned a corner in its monitory policy, signalling an end to a 48-year low in US interest rates.

US and especially European equity markets have been range-bound for some months now, unable to break through key resistance levels and frequently testing supports, looking set to trade lower rather than higher. A higher interest rate environment does not bode well for equities either, and nor do a much lower revised GDP figure as well as the horrendous non-farm payroll figure. Only strong consumer data is keeping the Dow from retreating to 10 000, although this is its next support level.

The outlook for all markets, except the Asian, is bearish.

The outlook in the longer term for commodities remains bullish. Geopolitical unrest will continue to bolster gold and it`s a safe haven premium despite the US`s early handover of Iraq - nothing has changed on ground level. Gold above the psychological $400 level will lend support and, over time could send the yellow metal back to its year high of $430.

OPEC`s inability to increase oil production by much more (as it is running close to capacity) and the fear of the supply disruptions a terror attack could bring, will continue to support a firm oil price.

However, the strongest cases for a bullish outlook on commodities come from China. The fact that the Chinese government is attempting to cool off the economy is not going to encourage 20% of the total world`s population to play catch up with the rest of the developed world, especially now that they have tasted the sweet fruits of capitalism and a Big Mac burger. If only half a percent of the Chinese population buy a car in the next few year, it will add up to more cars sold than twice the entire population of Ireland.

The decisions by the Federal Reserve to raise rates in the US by a quarter of a percent, and that of the European Central Bank to keep its rate unchanged, are the major factors driving the currency markets at this time. Higher interest rates normally equate to a stronger currency - the US, however, has some way to go to catch up with the Europeans.

Besides, with such a huge trade deficit, the question remains: does the US want to see a stronger dollar? Alan Greenspan`s "measured" approach statement, lower revised GDP figures and a sharp slowdown in business activity in the US Midwest all hint at relative low interest rates in the US for some time to come. At worst, the Fed might do another quarter percent at their its sitting in August. The outlook for the dollar is bearish across all currencies.

The South African economy is on a firm footing and inflation should remain within the Reserve Bank`s range for some time to come - so no interest rate hikes on the horizon. This is good news for retailers, the construction industry and most other companies not earning in foreign currency, as a strong rand seems here to stay.

The resource sector, in particular, has been hard hit by the strong rand in recent months; the coagulant to the haemorrhaging could be higher commodity prices which would offset the effect of the strong rand.

Stock selection is going to be critical for both long and short positions as heavy weighted resource shares in the indices might cause the effected indexes not to reflect the true market sentiment.

* Remember to look at our `Daily Review` (updated each morning) on www.gt247.com for an overview of the markets, or alternatively click on the link which will take you directly to the appropriate page.