National Bank Financial is sticking with its gloomy outlook for equity markets, calling for the S&P/TSX composite index to end the year at 10,500.

NBF’s new report says that synchronized central bank tightening, the ongoing U.S. housing market slowdown, and the Chinese central bank’s intention to slow lending and investment growth, “constitute a triple threat for the resource-heavy S&P/TSX index.”

“High-flying financial instruments such as emerging markets, small caps and commodities have gone into retreat since May 10,” NBF observes. “Investor sentiment swung abruptly from risk appetite to risk aversion when the Fed’s rate-setting statement of that date signaled a shift in the policy view to an inflation-alert stance from an equal balance of risks to the economy and price stability.”

“Given the predominance of natural resources in the S&P/TSX and – up to May 10 – its stellar climb from its trough of October 2002 (a rise of 116% compared to a modest 70% for the S&P 500), the Canadian benchmark was overdue for a major pullback,” NBF adds, noting that it has been 945 trading days since the last index correction of 10% or more, the longest such period of the last 35 years.

So, should investors buy into this commodities dip now, or look for more conservative assets? “We come down squarely for the latter,” NBF says. “The recent surge in base metals prices look more like a financially engineered speculative bubble than simply a result of booming Asian demand.”

“For investors eager to deploy liquidity, we believe that U.S. Non-cyclical large cap stocks offer a reasonable medium-term upside. In our Canadian sector rotation, we remain underweighted in banks, materials and energy. We are more upbeat on media and telecommunications and on counter-cyclical sectors like health care, consumer staples and insurance,” it concludes.