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The Federal Reserve's QE3 announcement prompted a big rally in risky assets. We were taken aback by the extent of the easing, because we had expected investors to have factored in Mr. Bernanke's move to unleash the "stimulus".

The Federal Reserve (Fed) will buy $40 billion worth of agency mortgage-backed securities every month until the US job market improves. Furthermore, the Fed will continue with its Operation Twist 2 program, keeping interest rates at near zero until mid-2015 and maintaining an accommodative monetary policy well into the economic recovery!

There can be no doubt that the Fed's move is unprecedented and it is astonishing that the American central bank is openly debasing its currency. More importantly, if the US job market does not improve soon, it is probable that QE3 will continue for several months or even years. In terms of morality, the Fed's latest policy initiative is questionable at best because an open-ended QE will diminish the purchasing power of its money and penalize savers. Nonetheless, from an investment perspective, QE3 will probably trigger a massive rally in global stocks and commodities. It is my belief that both gold and silver will appreciate significantly over the following months.

Turning to the stock market, it is notable that major US indices have climbed to multi-year highs and it is conceivable that the S&P500 Index will break out to an all-time high over the following months. Wall Street seems to be in the final innings of its secular bear market and a new high in the S&P500 Index will confirm the next primary uptrend. In terms of sectors, as long as QE3 is in force, consumer discretionary, technology, biotechnology, financials and precious metals miners are likely to outperform and the defensive industries will probably underperform the broad market.

Looking at commodities, the CCI Index has climbed to a multi-month high and hard assets are likely to inflate over the following months. It is notable that both copper and crude oil have reclaimed the 200-day moving average and this is a bullish development. I continue to believe that industrial commodities will continue to underperform precious metals.

Over in the precious metals arena, both gold and silver are soaring and at the very least, this rally is likely to continue until next spring. On Thursday, silver was the big beneficiary and I believe that over the following months, silver will outperform gold by a wide margin. Interestingly, the junior gold miners are also coming back to life. If my assessment is correct, the following months will be very bullish for the junior miners and this is the time to join the party.

In the currencies patch, the US Dollar has embarked on a new downtrend and further weakness is on the cards. Given the fact that the Federal Reserve is debasing its currency, the greenback should depreciate significantly against other forms of paper money. In terms of the technical, the US Dollar Index has slipped below the 200-day moving average and that line should now act as a source of major overhead resistance.

Finally, QE3 is already having an impact on bond yields and it is probable that long-term US interest rates will rise and the yield curve will get steepen. Conversely, bearing in mind the ongoing rally in risk, I believe that peripheral European bond yields will decline and high yield corporate bonds will also appreciate over the following months. Thus, this is the time to liquidate US Treasuries and allocate capital to high yield bonds.

(HK Edition 09/15/2012 page2)