Prepared by Chart Analysis Limited

-Global bond prices remain in overall upward trends, against a background of generally low inflation, but here also recent gains have been considerable.

-Although the all-important bond lead for stock markets remains favourable, trend acceleration is unsustainable beyond the short term and will give way to corrections in proportion to any additional near-term gains.

-The few non-performing stock markets, mostly in South East Asia, offer value but are not likely to rally significantly until investors can see beyond peaks in their interest rates and the present currency turmoil.

-The U.S. Dollar has resumed its secular advance against most of the world's currencies.

-There is still no evidence that sterling has peaked against the other European currencies. However, additional upward scope for interest rates is exaggerated, and the pound will fall sharply when they next decline.

-Crude oil (NYME) continues to encounter support near U.S.$19 despite wide-spread forecasts of oversupply.

The Buck Does Not Stop Here-It reminds me of one of those summer blockbusters from Hollywood. In this script a Spielbergian dollar-looking like T-Rex Mammon-devours all before it. The setting for this `Lost World' is an ancient continent, formerly known as Eurasia. The cast consists of various bureaucrats including lots of French politicians, who if not Jurassic, are certainly Medieval. They run around trying to avoid the big competitive dinosaurs, when not gelding Bundesbank officials, and are frequently munched on by little Crichtonesque critters. Meanwhile, T-Rex, incensed by hostility towards its offspring-Boeing McDonnell Douglas-runs amuck and even tramples the reserves of Eurasia's `little tigers.' Don't miss it because all the right people get eaten!

Moving from celluloid to real life, isn't globalization wonderful? A world that used to pass the buck now can't get enough of it. There hasn't been such a feeding frenzy for U.S. dollars since late 1984 when ex-stockbroker and U.S. Treasury Secretary, Donald Regan, wrapped the stars and stripes around his waist and bragged about a world-wide shortage of the greenback due to its popularity! Presumably not one of his better calls, because the Federal Reserve was about to turn on the printing presses, causing the U.S. currency's long downward spiral. Pundits were writing about `dollar revulsion' in 1995 before recognizing that both the Fed and the White House had rediscovered and embraced monetary and fiscal prudence. I've left out the boring details in this potted history.

Anyway, following a breather against the Continental European currencies and its bungee jump in yen during May, the U.S. currency is a collector's item once again. It is especially fashionable in South East Asia, where central banks had dumped it a couple of years ago in favour of the yen. I believe this global love affair with the U.S. Dollar has further to run. It looks great on the charts; it is a lot lower today against the other main reserve currencies than at its February 1985 bubble peak; the U.S. economy is considerably stronger, while those of Japan, Germany and Switzerland are weaker.

Bundesbank officials will probably jawbone some more, but hey, they have real problems to worry about, like how to get a job in Jospin's European Central Bank. I think Japan's BOJ and MOF would be quietly relieved to see the yen back over ¥120. The U.S. Dollar against the yen is currently my favourite position, closely followed by the dollar against the Swiss Franc. No thinking person would buy the Swiss Franc today, other than for a picturesque holiday, at least not while Hans Meyer of the Swiss National Bank remains anxious to end its bolt-hole status after over six years of recession and 0.5% growth forecast for 1997. Those who hold the Swissie do so out of habit. Meanwhile, with the dollar's strength revived, currency traders have suddenly turned their backs on a favourite mistress-Britannia Sterling-who was made so bountiful by the Bank of England's Hike 'em Eddie-a central banker truly living up to his reputation.

What about these stock markets! People have been worried about a meltdown for so long but will we first get a meltup? It's all good clean fun and very profitable, but it won't last, because accelerating trends are climactic by definition. The whistle to halt this charge will be blown when global bond yields start to rise. Recently, they have been falling faster than Tour de France leaders descend from Alpine peaks, so the next rise may be significant.

Higher Rate Folly-The dramatic and draconian hiking of interest rates in defence of currencies has a rich and spectacular tradition of failure. The latest examples come from South East Asia. Politicians never learn! Endorsements of the Bank of England's squeeze by financial journalists are farcical. The small inflation overshoot reported for June was due to the Labour government's budget, petrol taxes being a key contributor. Moreover if the Bundesbank's measures were used, UK inflation would probably be under 2%. The BOE is risking a hard landing unnecessarily. Rumours aside, there is very little chance of the Bundesbank raising rates to defend the mark at this time. Increases to curb inflation, such as Norway's quarter-point rise on July 16th are likely to remain scarce in coming months. The BOJ has indicated that it will not lift Japanese rates in the near future. U.S. rates may rise before year end, but not without some clear evidence of the economy picking up, accompanied by inflationary pressures.

U.S. 30-Year Treasury Bonds Challenge Their December Peak-The orderly recovery from April's low has continued, punctuated by small consolidations of exponentially shorter duration. This momentum, plus the upward dynamics evident throughout the rise, suggest that no more than temporary resistance will be encountered near the December peak at 115-17. A close under 113-00 is required to question this hypothesis.

UK Gilts Have Scope For An Upward Break-Gilts have been ranging since their spike to a peak near 115 in May and subsequent sharp correction. Since then the floor has been rising following each retest of the high. This evidence of continued demand, plus the large underlying base suggests that an upward break is likely before long. A close under 113-20 is needed to significantly delay this potential.

German And French Bonds Falter In Probable Consolidation-Following rallies to new highs for the year, both of these contracts have lost upside momentum. However the corrections are shallow to date and prices would have to close beneath 102 and 129.50, respectively, to question higher scope in coming weeks suggested by extensive underlying trading.

Italian Bonds Break Their Short-Term Uptrend Consistency-A small downward dynamic at the peak checked the recent steep uptrend for Italian bonds. Consequently a ranging corrective phase may ensue over the near term as gains are consolidated, but there is no clear evidence that a significant peak has been established.

Spanish Bonds Are Gradually Ranging Higher-Here also a pause is evident but Spanish bonds would have to close under 116 to record a significant upside failure of what remains a ranging uptrend.

Swedish Bonds Have Broken Their Short-Term Downtrend-Swedish bond yields had been ranging lower since their spike peak in March and this trend became very orderly from June until July 15th, when a small rebound occurred off the low. Consequently sideways and possibly somewhat higher trading is likely over the near term as stops are hit. However, in the absence of a clear upside dynamic, there is no evidence that a significant floor for yields has been seen.

Japanese Bonds Appear Capable Of Challenging Their March/April Highs-Japanese bonds are currently ranging beneath the year's earlier high and most of the day-to-day dynamics remain upwards. A close under 124 is needed to question scope for a retest of the March/April top up to 126, at least.

Australian Bonds Have Had One Of The Strongest Uptrends Since Their April Low-Despite the advance already seen the move has been orderly and punctuated by shallow consolidations. It will take a very clear downward dynamic to suggest a peak.

Conclusion On Bonds

Most of these markets have paused in probable consolidations following their latest and often strong gains. Overall, the technical evidence remains impressive as contracts continue to challenge and eventually clear former resistance levels. The particularly influential U.S. Treasury bond remains in form. Clear downward dynamics and/or violation of support levels are necessary to check overall upside momentum. Arguably, European high-yielders are the most speculative if you suspect that EMU will be postponed, because no risk premium is evident in today's prices. An important story behind the strong overall chart action, I continue to believe, is the market's gradual acceptance that benign inflation is not a temporary phenomenon.

More Trends Overheat, Increasing Risks As The Cycle Matures, But The Overall Environment Will Stay Favourable While Bond Prices Remain Firm-The pace with which in-form stock markets run, consolidate and then resume their overall upward trends continues to increase. Consequently good news is being discounted more rapidly and a speculative environment is clearly apparent, especially in Europe. This is a characteristic of bull markets in their latter stages and many of our short-term indicators are seldom out of overbought territory for long. Nevertheless trend acceleration is not yet excessive, relative to 1987, and a number of Pacific Rim markets have experienced counter-cyclical moves. The all-important bond lead has moved from bullish to neutral recently. However, provided that fixed interest markets do not experience more than temporary reactions and consolidations, we can expect primary uptrends for the world's leading stock markets to remain intact.

Watch The Charts If You Want To Monitor Trend Consistency And Spot The Eventual Turns-I suggest concentrating on the technical facts of trend consistency and dynamics, which affect crowd behaviour, eschewing most technical theory, which has all the limitations of any other analytical theories.

The Chart Analysis World Market Indicator (currently 1723), condensed to a 10-point scale this month has been rising faster since May than at any other time since late 1993. This rate of advance is not sustainable beyond the short term and the next loss of momentum evident is likely to coincide with an intermediate-term correction for the in-form stock markets. CAWMI is unweighted and calculated in local currencies.

MS Capital International's World Index (975) Is also becoming overextended and the next pause may be significant. A decline of over 60 points, exceeding the March/April correction, would question the overall upward momentum. MSCIWI is capitalization weighted and calculated in U.S. Dollars.

The U.S.A.'s Dow Jones Industrial Average (8059) has resumed its advance following a brief consolidation. A fall below 7800 is necessary to suggest a loss of upside momentum, confirmed at 7700, with an intermediate-term correction evident at 7600. The equivalent levels for the Standard & Poors 500 Index (936) are 900, 890 and 878. The NASDAQ Composite Index (1577) is accelerating. Watch for a downward dynamic to check the powerful upside momentum evident since May.

Canada's Toronto Composite Index (6755) has surged ahead following a six- week consolidation, evident above the March peak, between 6540 and 6380. A fall under the former level would suggest a potentially important loss of momentum.

Japan's Nikkei 225 Stock Average (20,519) has steadied in an apparent consolidation and would need 19,600 to indicate a further correction before challenging the extensive prior resistance from the upper side of the 6- year range. This pattern has always looked like a developing base and with a considerably higher floor established near 17,400 this year, the next challenge is likely to prove successful.

Taiwan's Weighted Price Index (9571) has a similar overall pattern to Japan, only it is a year further ahead in the recovery cycle. The advance has been extended following a consolidation between 8600 and 7900 and a fall beneath the latter level is required to indicate more than another temporary pause before the psychological 10,000 level is challenged.

Hong Kong's Hang Seng Index (15,706) encountered good support near 14,000 before rallying back over the psychologically significant 15,000 level. A decline back under this latter point is necessary to indicate a further consolidation before underlying trading sustains higher levels.

Indonesia's Jakarta Composite Index (723) has fallen back to initial support in the 720 to 710 region. A move under the latter level would signal a failed upside break, but this would not look serious unless 630 was also breached.

Malaysia's KLSE Composite Index (1004) fell beneath its important July 1996 and May 1997 lows near 1050 before encountering some support near the psychological 1000 level. A push back over 1050 is the minimum required to suggest that a new floor has been established.

Singapore's Straits Times Index (1920) has drifted back under the psychologically significant 2000 level to retest the important 1995 floor at 1920. A rally to 2010, breaking the progression of lower highs is the minimum necessary to suggest a steadier phase, confirmed over 2120.

Thailand's Bangkok SET Index (655) accelerated to last month's low-a trend-ending characteristic-and rebounded even faster, confirming that a very significant floor has been established. Downward risk is now limited to a partial retracement of gains in a base extension phase, indicated by a move below 600, before the recovery is extended.

South Korea's Composite Index (740) appears to be consolidating the May/June gains. Clear pattern deterioration would be indicated below 725, while 800 will signal a resumption of the recovery.

Australia's All Ordinaries Index (2669) has spilled over into a corrective phase following a steady advance from April to early-July which became somewhat overextended. However, if over half the gains are maintained that have been seen since the February peak at 2500 was cleared, there will be little reason to expect more than a temporary consolidation within the overall upward trend. A move much beyond that would look like an intermediate-term reaction. The bull market would resume above 2750, but it may take a while. The All Mining Index (843) has remained weak since peaking in May. However, its decline is starting to look overdone as it approaches the important 1995 low at 800 and there is historic trading below that point. This suggests that any additional near-term weakness will prove difficult to maintain.

New Zealand's Capital 40 Index (2495) surged above historic resistance near 2440 before succumbing to a correction. Provided that support is now encountered above or near that old high during this phase, underlying trading should sustain higher levels in coming months.

South Africa's JSE Industrial Index (8936) pushed steadily up through its 1996 peak near 8700. If it can consolidate gains near or above that level, underlying trading should sustain higher levels before long. A fall beneath 8500 is required to indicate an upside failure. In contrast, the JSE Gold Index (969) accelerated downwards and looks overextended. It is also not far from the important 1992/93 trough which stretches down to 760. However, this pattern shows insufficient base to support more than a technical rally at present.

Belgium's BEL 20 Index (2541) looks overextended but would have to fall below 2400 to show a significant change in trend consistency.

France's CAC 40 Index (2958) has hesitated near the psychological 3000 level following an orderly advance up out of the large February-June range. A slight erosion of support would be evident under 2900, but a move below 2800 would be necessary to show a potentially important loss of overall upward momentum.

Germany's DAX Index (4227) appears somewhat overextended following its latest gains which include acceleration. Watch for a downward dynamic to show some loss of near-term momentum.

Spain's Madrid SE Index (618) remains in a strong uptrend and would have to fall under 575 to suggest more than a temporary consolidation.

The Netherlands' CBS All Share Index (646) appears overextended following its persistent advance from the February-May range centered on 500. A closing basis decline of 10 points from a high would indicate at least a short-term consolidation.

Sweden's Affaersvaerlden Index (3196) has extended it push up out of the lengthy February-May consolidation and would have to fall back under 2900 to indicate a potentially serious loss of momentum.

Denmark's Copenhagen SE Index (656) is becoming overextended once again, but a reaction in excess of 32 points, exceeding the March/April pullback, would be necessary to suggest more than a short-term consolidation.

Norway's Oslo SE Index (2121) would need to fall under 2000 to commence an erosion of support which would look significant beneath 1950.

Finland's HEX General Index (3530) would have to decline below 3120 to suggest more than a short-term consolidation, confirmed below 3000.

Italy's BCI Index (922) has now cleared all historic resistance. A fall back under 800 would be required to indicate an upside failure.

Switzerland's Swiss Market Index (5868) has paused within its steep uptrend which looks overextended. Nevertheless a decline under 5700 is necessary to indicate more than another temporary consolidation.

The UK's FTSE 100 Index (4949) has been choppy recently and may encounter some resistance near the psychological 5000 level, but a break below 4700 would now be needed to indicate a significant corrective phase within this ranging uptrend.

Conclusion On Stock Markets

Veteran FMs know that I have always shunned both fundamental and technical price targets, regarding them as dubious conclusions based on a most inexact science. Some readers will disagree, but probably not with my next opinion-that the in-form stock markets have moved considerably higher than most experienced observers would have dared to hope a couple of years ago. Common sense suggests that investors are converging in what will most likely prove to be an important buying climax.

Yes, many will say, but when? Absolutely no one knows, but the charts should show us, as they have before, although on past evidence most people will not be receptive to the message. I do not believe that the end of this bull market is at hand, but I do see more parabolic curves forming among the leading indices, particularly in Europe. Therefore I suspect that we are observing at least the beginning of the end for this equity cycle. Veteran subscribers will know that I have not previously said anything like this throughout the entire advance of the last two and a half years or more, although I have looked for an intermediate-term correction every so often, such as we saw in mid-1996 and earlier this year.

In addition to the bond lead, the timing of a major decline will probably depend on how many breathers the leading markets take in the form of ranging consolidations as opposed to climactic accelerations. If frequent pauses are seen, the bull market could still carry on for many more months. Conversely, persistent trend acceleration could bring it to the brink of a very substantial reaction in a matter of weeks.

Renewed Love Affair With The U.S. Dollar While Flirting With Sterling Continues-Respites are a law of nature, and the passion for currency trading dissipated for a while as the U.S. Dollar entered what proved to be a long trading range against the Continental European currencies in February, having returned to the important 1993/94 highs. Simultaneously, Japanese monetary officials were trying to slow the yen's descent, and proved far more successful than they would have wished, orchestrating a panic attack during which everyone dumped their favourite currency position.

Subsequently, high-yielding sterling has led a renewed advance against the other European currencies in what has been a preview of the big story-the world's renewed love affair with the U.S. Dollar. This has broken out everywhere, especially in South East Asia, where `little tiger' currencies are being knocked off like tenpins in a bowling ally. The charts can support further gains by the greenback.

The U.S. Dollar Breaks Decisively Upwards Against The Mark-The greenback has risen persistently since clearing lateral resistance near DM1.74. A fall back beneath this level is required to suggest an upside failure, which would be confirmed in the unlikely event of a decline under DM1.70. Assuming the upward break is maintained, the chart shows more than enough underlying support to sustain significantly higher levels.

The U.S. Dollar Should Catapult Up Out Of Its Broad Range Against The Swiss Franc-Following this year's earlier profit taking in the dollar against the Swiss Franc, which culminated in an acceleration to just under SF1.38, all the daily dynamics have been on the upside as the greenback ranged back towards lateral resistance between SF1.48 and the March high at SF1.4919, just beneath the roundophobia SF1.50 level. The build-up of support in recent months suggests that no more than temporary resistance will be found near those levels, and once cleared, the dollar could easily catapult higher. A fall back beneath SF1.44 is necessary to question this hypothesis for a sustained upward break. The futures contract chart (September CME) has already broken its lows.

The U.S. Dollar Is Moving Up Through Lateral Resistance Against The Yen-A higher reaction low at ¥112, followed by the upward dynamic through lateral trading just over ¥115 on July 15th, suggest that the dollar is completing its support building phase against the yen prior to a test of overhead trading starting at ¥120. No more than temporary resistance is likely to be encountered from the May reaction high near ¥117. A move below ¥112 is necessary to offset this hypothesis.

The U.S. Dollar Has Broken Up Out Of Trading Ranges Against More Of The South East Asian Currencies-Following devaluations by the Thai Baht and the Philippine Peso, the U.S. Dollar has surged up out of prior trading ranges against most of the other South East Asian currencies. Moves back beneath M$2.52 against the Malaysian Ringgit and Rp2430 versus the Indonesian Rupiah are necessary to question near-term scope for additional gains which could be substantial. Against the Singapore Dollar the greenback has burst above the March-May highs at S$2.5925 and a fall below S$1.4450 is now needed to question scope for additional gains.

The Australian And New Zealand Dollars Have Uncoupled From The U.S. Currency-Both the Australian and New Zealand currencies were U.S. Dollar proxies for a long time, outperforming the greenback until peaks at U.S.$0.8214 in December and U.S.$0.7175 in November, respectively. Subsequent activity has been ranging top development followed by emphatic downward breaks in recent weeks. Upward scope appears limited to temporary technical rallies, in response to short-term acceleration such as we are seeing at present, before extensive overhead supply forces additional weakness.

Sterling Falters Near Its November-January Peaks Against The U.S. Dollar-The pound has experienced another run as the world's strongest currency. Its recent dip back under U.S.$1.68 may be no more than a temporary triggering of tight stops beneath psychological resistance from the year-end peak up to U.S.$1.7167. Certainly sterling looks well supported against even the strong dollar. A break under U.S.$1.65 is required to reaffirm resistance near the former high. However, while there is currently no clear evidence to suggest that sterling will not move slightly higher against the greenback, the Australian and New Zealand Dollar trends discussed indicate what will happen when those high interest rates start to come down.

Sterling's Advance Against The Mark Is Beginning To Become Overstretched But There Is No Loss Of Form Evident At Present-In contrast to its ranging advance of previous months, punctuated by 12- to 13-pfennig corrections, sterling has pushed sharply higher against the mark in recent weeks. While this trend is beginning to appear somewhat overextended, a fall below DM2.94 is currently required to check near-term pattern consistency. A setback of over 13 pfennigs is required to question the longer-term uptrend.

Sterling Consolidates Its Recent Upward Break Against The Swiss Franc-The pound encountered good support from the lower side of its range against the Swiss currency in May and rallied sharply up through the February-May highs. A probable consolidation is underway prior to renewed strength as suggested by underlying trading and the overall upward trend. A breach of SF2.44 is needed to indicate a deeper correction during this phase and a clear break under SF2.40 to signal an upside failure.

Sterling Is Moving Above Lateral Resistance Against The Yen-An apparent support building phase has been underway since sterling bottomed in early June against the yen. The push above lateral trading near ¥193 indicates renewed demand and a decline beneath ¥187 is required to offset a further challenge of overhead trading.

Crude Oil Remains In A Potential Bottom Area-The September NYME crude oil contract saw a rebound in early July but that rally was short lived. However a retest of the floor just under U.S.$19 was followed by an upward dynamic on the 15th. Consequently a close under this level is necessary to offset scope for a ranging recovery. Nevertheless, without the re-emergence of a backwardation, such as we saw during the shortage last year, no more than a technical rebound from historic trading is indicated at present.

Copper Rally Smashed By Historic Resistance-Resistance for CMX copper in the 125 cents to 145 cents region is taking on mythic proportions. Having turned back every rally since at least 1980, it has just smashed this year's advance, after the expiring July contract peaked at 123.1 cents while the September position shown reached 120.5 cents. The speed with which copper is falling suggests that it has yet to reach a floor. The last base is evident on continuation charts below 97 cents.

Zinc Living Dangerously With The Last Surviving Uptrend In Futures Traded Metal-Zinc has advanced almost 50% so far this year and there is currently no evidence that this consistent trend is ending. However copper's recent collapse and the generally weak tone of other industrial metals, not to mention the sell off in the precious sector, suggest that zinc's uptrend is now in injury time. Nevertheless, a clear downward dynamic and/or breach of U.S.$1450 are necessary to signal a peak.

Gold Has Steadied Above Historic Support But Needs An Upward Dynamic To Indicate More Than A Technical Rally-Historic charts show an important floor at U.S.$300 in 1982 and near U.S.$285 in 1985. Both of those lows occurred after downward accelerations and were followed by rallies to U.S.$500. Such a strong rebound seems unthinkable today, as it did then, but the downtrend looks overstretched and the price did accelerate recently. Nevertheless it takes upside action to change market sentiment and gold shows little life at present. Until a clear upward dynamic occurs, gold remains susceptible to a further test of underlying trading.

The Global Economy

The overall outlook for moderate growth and low inflation should continue for so far as one can reasonably expect to look ahead with any analytical precision. There are too many economic weak spots, discussed here, for any widespread overheating to occur. However, with more countries benefiting from GDP expansion than ever before, the risk of deflation appears overstated. It would probably take a global stock market slump to threaten growth and increase deflationary pressures. Equities have certainly been in ebullient form, some Asian markets excepted, and the 10th anniversary of the 1987 crash in October is bound to create a few jitters and revive the bearish forecasts. U.S. and European trade friction over the Boeing/McDonald Douglas merger could also unsettle investors.

Nevertheless, it would probably require an unforeseen disaster with widespread economic consequences, or a resurgent U.S. economy that prompted the Federal Reserve to tighten monetary policy considerably, to trigger a significant stock market sell off. The former is rare and can seldom be predicted except perhaps just before the event. The latter is possible, but looks improbable today, and would be forewarned by evidence of a growth spurt, leading indicators of inflation and a steep increase in bond yields.

The UK economy has been Europe's bright spot over the last two years but further growth is in jeopardy. The combination of fiscal tightening in last month's budget, and a soaring pound in response to interest rate hikes to date and anticipated in future, risk a hard economic landing. While higher rates are preferable to income or corporate tax increases, which reduce opportunity and incentive by penalizing success, they are an overkill under current circumstances.

June's slightly higher inflation figure was due mostly to budgetary policy changes such as Labour's petrol tax increase. Excess consumer spending is a blip caused by the one-off building society windfall. If the Bank of England pushes sterling higher with further interest rate hikes, as seems likely, the economy will probably stall. Tax revenue would plummet, widening the budget deficit, while an overvalued currency would cause a sharp deterioration in the trade balance by attracting imports and pricing exports out of the global economy, and discouraging tourism. Against this background the UK could only be poorer and unemployment would increase.

Continental Europe is experiencing a small and mostly export-led recovery due to devaluation and low interest rates. However the fiscal policy squeeze to meet Maastricht criteria is hardly appropriate under current economic conditions of stagnation and high unemployment. Also, the structural problems of overregulation and overtaxation persist and are likely to be compounded by the new French government. The bright spots are booming bond and stock markets, but corporate and consumer confidence remain low, a problem compounded by the increasingly unpopular political drive for EMU. Consequently growth is likely to remain sluggish and undershoot official forecasts in which the issuing governments have a considerable self interest.

The U.S. economy is well into its 7th year of economic expansion which should continue, as the first quarter surge has proved to be an aberration. There is little evidence that above-trend growth is re-emerging, although this has been forecast by many economists, and inflationary pressures remain quiescent.

Japan's export-led economic recovery should continue especially if the yen retraces more of its recent gains. This would help extend the stock market recovery, improving bank balance sheets and consumer confidence. While the banking crisis is well past its nadir, old skeletons, including racketeering scandals, continue to emerge and there is uncertainty over forthcoming deregulation. The much anticipated interest rate hike from its current floor level is likely to remain on hold for a while longer.

The outlook for Asia's `little tigers' is mixed, affected by high interest rates where currencies have been under pressure, devaluations and competition. Thailand's problems have had an unsettling effect in South East Asia, but its forced devaluation last month will lead to lower interest rates, and eventually, an improved economic outlook, albeit at the cost of somewhat higher inflation. This is also true for The Philippines following its recent and related devaluation. Malaysia is the next target for currency speculators and this month's interbank hike to 14.3% from 8.33% will obviously not help the economy, especially given the heavy bank lending to property developers and a widening trade deficit. Taiwan's technology-led economy should benefit from global demand. Hong Kong will gain, at least initially, from the smooth changeover and its role as China's capitalistic spearhead.

Aggregate GDP growth in Latin America is likely to be near 4.5% this year and possibly higher in 1998. This is being helped by exports as these countries dismantle trade barriers and form a block to deal more with each other. Risks include the possibility of another Brazilian devaluation, although perhaps not before the presidential elections next year. Despite this Brazil is among the countries most favoured in Latin America, in a recent poll of investment managers, along with Argentina, Chile and Mexico. Peru, Columbia and Venezuela were regarded as more risky at present.

Government Bonds

Sentiment can change quickly when prices are moving rapidly as we have seen recently. Therefore long-term forecasts involve too much conjecture and are unlikely to be helpful. However we need to focus intently on the factors that are currently influencing investors, with particular emphasis on what could go wrong. Once again bond investors and traders have benefitted from the old story of abundant liquidity and quiescent inflation. Moderating GDP growth in the U.S., belief in a broad EMU `done deal' and the gold-led fall in commodities have propelled bond prices higher recently.

What could go wrong? One short-term danger is that prices soar too high on euphoria, only to fall back sharply in a bout of self- feeding profit taking. Price trend acceleration would provide the prior warning. This would be revealed by the charts and could become apparent in only a few days.

Another risk would be a sudden growth surge by the U.S. or Japan, reviving fears of higher interest rates in both countries. The U.S. bond market is the largest by far, and therefore the most influential, while Japan has been the wellspring for much of the liquidity sloshing around in financial markets.

The belief in smooth progress towards a European single currency could prove to be an illusion. EMU is an increasingly unpopular and therefore shaky edifice, without any foundation in economic logic, but rather thrown together by political will and ambitions, cemented by fudged criteria.

Finally, the gold-led slump in commodity prices could go into reverse. There is no contravention of supply and demand laws to keep commodity prices low indefinitely, just as their best gains also prove to be ephemeral.

Which of the these will be next to trouble bond markets? As we have already seen some trend acceleration, temporary problems of excess remain. EMU cannot be a done deal while Germany and France remain unlikely to meet Maastricht criteria, new fudges are attempted almost daily and the issue of who is either in or out remains contentious. Logically, the next significant move in commodity prices is upwards, although there is little evidence of this at present.

In conclusion, short-term overheating by bond prices is most likely to cause some temporary problems which could easily be compounded by the next round of EMU jitters. However, these are unlikely to end the overall bull market as real yields still offer value given the persistently low inflation pressures, including commodity prices. The greatest danger would occur should we get an overlapping round of short-term interest rate increases in the U.S. and Japan. This is likely at some point, but does not appear to be a current risk with the American economy still moderating from its strong first quarter, while Japan has enough remaining economic problems of bad debts and balance sheet weakness to defer any change in monetary policy for a while longer.

Stock Markets

As with global bonds, trend acceleration remains the greatest short-term hazard for the in-form stock markets, which have been in ebullient form. While we would all love to know at what future date a significant peak will occur, no one can predict this accurately although we should have a reasonable chance of recognizing trouble in its earlier stages. If the latter is punctuated with periodic ranging consolidations, as we have seen for the most part, the markets will become less overheated and the cycle will be longer. However, parabolic acceleration would overdiscount favourable news, indicate increased speculation, and quickly reach an unsustainable peak.

Like all bull markets, this one is being driven primarily by liquidity, sentiment and the expectation of higher corporate profits. However the background factors for individual markets obviously differ, sometimes considerably. For instance, the U.S. market continues to benefit from the best corporate return on capital. These profits are primarily due to a seminal recovery resulting from restructuring and investment in new technology, augmented by share repurchases. American multi-national companies continue to prosper from globalization. However because valuations are high, shares reporting disappointing earnings are quickly punished.

In contrast, European equities have been helped more by devaluation and low short-term interest rates. Consequently Continental Europe's share prices probably have less potential over the longer term, especially where earnings growth is curbed by regulations, unions, the social wage and other high taxes. Only the multi-national companies can partially escape this handicap.

The UK's outlook had been better because its economy more closely resembled that of the U.S. rather than the European model. However this advantage has been eroded somewhat by the Labour government's windfall tax, the abolition of dividend tax relief to pension funds, minimum wage and Social Chapter. Moreover interest rate hikes have increased borrowing costs and kited sterling to levels that can only damage corporate profits for Britain's exporters.

Australian and New Zealand equities have benefitted from lower interest rates and the sharp drop in their currencies against the yen since May. However they are not helped by the generally lower tone for commodity prices, copper and wool excepted.

Japan's export-led recovery continues but earnings growth for the companies will decline unless most of the yen's recent gains are reversed. The Japanese banking crisis is well beyond its nadir, following firmer property prices and the modest stock market recovery, but uncertainty over financial deregulation lies ahead. The domestic economy is reviving slowly and multiples remain generally higher than those of Western markets.

The Hong Kong market should benefit from competitive valuations, assuming no political problems, as the China risk factor premium gradually disappears. Taiwan remains in form but the valuations are now uncomfortably high. South East Asia's markets remain out of favour due to high interest rates caused by the `Thailand syndrome,' resulting devaluations for the baht and Philippine Peso, and fears that the Malaysian Ringgit and Indonesian Rupiah could follow. Nevertheless, devaluations have now put a floor under the Thai and Philippines stock markets, while Malaysia and Singapore are arguably reasonable value. It would be surprising if they did not stage a partial catch-up rally before the global bull trend runs out of steam. South American markets are among the prime beneficiaries of South East Asia's loss of form in the current equity cycle. Most fringe emerging markets continue to do well, attracting interest from the U.S. and also Europe. This is a phenomenon of maturing stock market cycles and should persist, barring extremely unsettling local developments, until Wall Street has established a significant peak. Therefore currently fashionable markets such as Russia and Hungary should continue to do well while the DJIA rises. However on past form for emerging markets they could fall 75% to 90% when U.S. stocks are next in a genuinely bearish phase, only to rise spectacularly once again when the next overall bull market is clearly established.

Currencies

Interest rates remain the dominant fundamental for currency markets and have propelled sterling higher on Bank of England rises seen and anticipated. This will crucify UK exporters, eventually causing the BOE to reverse policy, with the pound falling even faster than it has risen. Meanwhile, further gains remain probable, at least until Eddie George and/or Gordon Brown try to jawbone a correction. Sterling's main charge is against the other European currencies although it has also moved back to its highest level against the yen since early May.

The yen's next move is the most controversial call following its Sakakibara-induced surge in May. While this has given way to trading ranges, people are divided as to the next trend, although sentiment indicators dipped to only 30% bearish recently, against nearly 90% two months ago. On the one hand there is Japan's huge trade surplus, expected to decline eventually due to political pressure, a gradually recovering domestic economy, and perhaps, an appreciating yen. On the other there are the lowest interest rates for any currency, although expected to rise over the intermediate term.

The rest is political and everyone has their own views as to what Japan and the U.S. will do, if anything. Certainly Japanese monetary officials have shown far more of an inclination to jawbone than U.S. Treasury Secretary, Robert Rubin, or anyone else in the Clinton Administration, let alone the Federal Reserve. Having capped the yen, perhaps more effectively than they had hoped, Japanese officials have shown their readiness to talk it higher when the June floor near ¥110 is approached.

In conclusion, I believe the U.S. Dollar is much closer to a floor against the yen near ¥113 than a peak. It is obviously very expensive for speculators to hold yen without a price trend in their favour so it is likely to `surprise' with a sharp fall before long. Surplus dollars held by Japanese corporations are understandably trend driven. They will do what is most profitable, and there will be a lot less incentive to repatriate capital if overseas bond markets remain in form and the yen is not rallying. It would not be in the Japanese government's financial or political interests to sell U.S. Treasury bonds, although I do not doubt that it made the entire nation feel better when Prime Minister Hashimoto raised the issue last month.

The U.S. Dollar has logically followed sterling into new high ground against the mark and other EMU candidates. This produced the surprisingly bold comment from Bundesbank president, Hans Tietmeyer, that `the mark's correction has without a doubt come to an end.' The market briefly convulsed for a day, producing a small key day reversal on the charts. However the dollar soon recouped the loss and more when another German official endorsed Tietmeyer's comment while adding that, of course, they did not want the mark to move in the opposite direction.

Well, you cannot have it both ways as the currency markets will not stay in a narrow trading range for long when there are primary trends and significant interest rate differentials to exploit. Speculators have probably correctly assumed that Tietmeyer's comments were mainly for domestic consumption since the German electorate is clearly less happy about giving up the mark than even the Bundesbank. It will take more convincing jawboning to check the U.S. Dollar's rise against the mark and other Euro currencies. The greenback is also appreciating against the Swiss Franc, albeit at a somewhat slower rate recently. Swiss National Bank president, Hans Meyer, remains anxious to end the currency's bolt-hole status, due to six years in recession and counting.

Declining interest rates and the weak commodity indices have caused the Australian and New Zealand Dollars to break downwards against the U.S. currency. Consequently there is little chance of either retesting its year-end peak against the greenback. In contrast, a small interest rate hike firmed the Canadian Dollar somewhat.

Commodities

Gold has fallen back to historic support on the latest news of central bank selling, this time from an unexpected source-Australia. It is cheap but a catalyst remains necessary to spark interest beyond a temporary technical rally. Silver remains weak in sympathy, and also due to concerns that digital photography will increasingly replace standard silver-based film. Platinum and palladium fell sharply from their peaks and a further delay in supplies from Russia is necessary to revive the squeeze.

Oil prices have steadied in historic support but, unlike last year, supplies of refined products remain abundant and U.S. reserves are high. Although global demand is rising inexorably, a supply disruption due to strike or accident is currently required to boost prices.

The fund-assisted advance in copper has been dramatically reversed, leaving Zinc with the sole remaining uptrend among futures traded base metals. Consequently the price would be extremely vulnerable given any clear evidence of pattern deterioration.

Generally favourable crop conditions in the U.S. pushed prices for many agricultural commodities lower recently, particularly corn, wheat and soybeans. All have steadied in historic support helped by some dry weather but there is no reason at present to expect more than a short-covering rally.

Government Bonds

Investment positions in all long-dated bonds can be retained as real yields still offer reasonable value. However these are further diminished following the latest strong advances by prices. Therefore cautious investors may wish to either lighten on strength, and/or upgrade quality among European issues by switching out of the higher yielders. This would no longer sacrifice a considerable amount of potential as yield convergence has been considerable.

For futures traders, the buy-low- sell-high baby steps strategy, long positions only given the uptrends, would have reduced positions which had last been increased during the June reaction. This tactic of buying on weakness is probably still appropriate, although the risks are obviously growing with each new high for bond prices or fall by yields. If prices fall during the corrective phases more slowly than they had risen, odds favour no more than a temporary consolidation which prevents overheating. Downward dynamics and/or a faster rate of decline would indicate a deeper correction until countermanded by an upward dynamic. In the event of clear uptrend acceleration, I would use fairly tight trailing stops and stand aside once hit. Having been heavily overweight in bond futures longs during April, I have far fewer positions today.

Stock Markets

While the in-form developed stock markets-mostly North American and European-have been advancing for a considerable time, people have seldom made money more easily than recently. Obviously this is unsustainable and will be followed by a significant correction, possibly before year end. The advance signal for that shake out should be a sell off in government bonds. Meanwhile bond prices continue to point higher for stock markets in overall upward trends. Nevertheless, it would be prudent to reduce exposure during this strength. Trailing stops are also advised for high-flying positions, especially where clear trend acceleration occurs. This is particularly appropriate with stock market index futures contracts.

I am currently out of European contracts, having sold long positions too soon, for peace of mind and travel considerations. However we are still running a number of highly profitable trades in the Stock Market Futures DTR service. My main remaining position is a long bet on the Hang Seng Index, purchased during the June correction, which I will hold for additional gains provided 15,000 is not breached. I also have a small Nikkei long, protected at 19,500, which has not done much, but I consider it to be comparatively low risk.

Briefly, I think bulls of Japanese equities will be rewarded over the longer term, and this market probably has less downside risk having lagged while being supported by the underlying base. South East Asia will continue to underperform until investors can see beyond a peak for interest rates. Taiwan is a hold, despite the multiples, while the trend momentum is maintained. Gold shares have been a disaster area. It is too late to sell and they now offer long- term recovery potential for contrarian thinkers. Most of the recently fashionable emerging markets should continue to do well in this increasingly speculative stage of the bull market, at least until Wall Street peaks.

Currencies

Sterling led the U.S. Dollar higher against the mark and other Euro-candidate currencies late last month, following a long period of ranging. That was the signal for a more aggressive long stance, as suggested in FMP17 on June 30th , following the light baby steps range trading phase. Sterling is an eventual candidate for a spike peak, so I would protect profits with a stop at DM2.95, under Friday's upward dynamic, switch to 15-pfennig trailing above DM3.10 and lighten in the event of acceleration. These tactics would also be appropriate for sterling against the mark-block currencies

For the U.S. Dollar against the mark, speculators could protect the increased longs discussed in FMP17 with a stop at or just below the breakout point at DM1.74. However, I would emphasize for long-term dollar holders that a move below this level would only question near-term upward scope. It would not challenge the overall upward trend. Above DM1.84 I would switch to a 10-pfennig trailing stop. Light baby steps jobbing would be appropriate in the event of ranging or if the dollar were to run ahead too quickly.

The baby steps tactic, long positions only, has also been effective for the U.S. Dollar against the Swiss Franc, and may remain so given some lateral resistance between SF1.48 and the June peak at SF1.4919. However, I would be surprised if this is not successfully challenged in coming weeks and I would hold most positions for the possibility of a run if SF1.50 is decisively cleared, protected with a 5-centime trailing stop.

In addition to U.S. Dollar longs against the European currencies, mainly the Swiss Franc, I added considerably to my position against the yen that I have been gradually building, on the recent dip to ¥112, as discussed in FM157. I suspect that not many traders hold dollars against the yen, judging from sentiment, which is probably a point in its favour. I would have to reconsider if ¥110 were breached for more than a day or two. In the meantime, I am happy to take the interest rate differential. The spotlight of attention could swing back to dollar/yen if or when the greenback's additional gains against the mark provoke further jawboning by the Bundesbank.

While I confine my currency trading to the reserve group, it looks to me as if the speculators who have been selling South East Asian currencies remain on a winner. None of the governments in those countries would keep interest rates at punitive levels for long. It reminds me of sterling's devaluation in 1992 and the further break up of the ERM that followed. Meanwhile, former hard currencies like the New Zealand Dollar are being targeted. Our Spot Currency DTR service has been running a short NZ$ versus the U.S.$ since June 27th.

Commodities

While keeping an eye on them, I have done very little in commodities recently, being preoccupied by bonds, stock markets and currencies. The small positions mentioned last month in pork bellies and crude oil have been largely offsetting and I am no longer interested in the former. The various commodity DTRs are having some success, mainly by moving quickly on trend turns. While there have been some sharp moves, most have been of very short duration.

One that interests me, although not immediately, is zinc where the DTRs continue to run a long position in a very consistent uptrend which commenced in January. This has now risen almost 50% in seven months and the trend has steepened in recent weeks. Since all other futures traded metals have either fallen sharply from their highs-copper, palladium and platinum are the latest-zinc should be in for a tumble when it turns. I am watching for this but would not sell short without a good chart signal.

Cash

Timing is everything. The Australian and New Zealand Dollars, which were often listed as suitable proxies for the U.S. currency last year, would have been disasters recently. My current choices remain the U.S. Dollar and its more risky but previously somewhat better performing and higher yielding substitute-sterling. However, I suspect that the pound is now in injury time.

July 18, 1997 David Fuller, Chairman

The Global Investment Strategy Letter

Chart Analysis Limited

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