Bet on Risk as Silver Linings Emerge: Strategist
Investors have been growing gloomier about a rebound for the U.S. economy for the second half of 2011. Goldman Sachs, the IMF and the Fed have already cut their estimates for GDP growth for the rest of this year.
But one strategist says despite the likelihood of weak data over the next few weeks, he's already seeing the first signs of an economic turnaround, which in turn will boost risk assets such as emerging market stocks and commodities.
"Our best guess is that the U.S. data backdrop will be patchy for around another 2 to 3 weeks," Richard Franulovich, senior currency strategist at Westpac Global Markets in New York wrote in a note to clients."Beyond that and for the balance of Q3 however the picture looks more risk supportive."
Franulovich sees several signs of a turnaround, including the recent rebound in the Richmond Fed's index of manufacturing activity, which ticked up to 3 in June from -6 in May.
"It has a history of leading other regional surveys," he wrote in the report. "On its own it's not enough to revise Institute for Supply Managers expectations for June but it does hint at potentially firmer regional purchasing manager's indexes for July."
He also expects a continued ramp up in auto production given industry watcher Ward's Auto's estimates for production in recent months. According to those estimates, production increased from 7.9 million units in May to 8.5 million in June and 9.5 million in July.
Franulovich also says the recent rally in 10-year U.S. treasury yields, the Shanghai composite and copper prices are proof that a low for risk assets could already be in place.
"Each market will trade off its own idiosyncratic factors but the overall message is undeniably positive for risk asset broadly," he noted.