Goldilocks emigrates to US but fears it’s all been a dream
The May FMS saw the impact of a straightforward growth shock. Eurozone fiscal
concerns plus worries on China tightening has led to a rapid cooling in global growth expectations to +72 from +82 (back to levels of May 2009). This was headlined by a 17-point fall in EU growth outlook to +67; the second biggest 1-
month fall on record. A net 3% of regional PMs now expects a weaker Chinese
economy over the next 12 months (the first negative reading since March 2009).
Liquidity silver lining?
Interest rate expectations continue to be pushed back with almost 60% of investors seeing no Fed move before 2011 at the earliest. Even more conclusive is that 89% of investors see no ECB move before next year.
Cash levels restored; US is region of choice
Average cash levels moved sharply higher to 4.3% (from 3.5%) ending the sell signal triggered last month but falling short of a buy signal at 4.5%. After the extreme optimism of April, asset allocators cut equity overweight to a net 30%from 52%); bonds benefited, climbing 19 points to a net 29% UW. US is now the region of choice (+22% OW) as GEM conviction has waned (19% OW vs 31% in April). Despite risk aversion commodities retained support at 17% OW (from 20%)helped by a net 13% viewing oil as undervalued (from 2% overvalued in April).
Relative pessimism on Europe starts to look stretched
The differential in 12-month relative corporate profit outlook between EU and US is now at the highest level since July 2003. As much as the US (and US$) is, understandably, viewed as a safe haven, the relative optimism looks close to contrarian trigger levels. While falling back from the multi-year high seen last month, investors remain OW Japan in regional allocations (net 5% vs. 12%).
Growth concerns but pro-cyclical sector tilt retained
Concerns over global growth saw broad rotation into defensive sectors out of banks and basic materials. However, the top-3 sectors remain technology, energy and industrial suggesting the cyclical trade retains some attractions. Three big GEM-demand related sectors (industrials, staples and materials) are now seen as overvalued but remain overweight in portfolios.
US underperforms vs. Europe. $ falls vs. Yen and Euro. Buy utilities & banks; sell technology & industrials. Back testing indicators say buy EU, sell US in terms of relative regional preferences.
Click on chart to enlarge, courtesy of BofA Merrill Lynch.
Mid-cycle crisis ongoing? Is Goldilocks (that has moved to US now) a normal precursor of a Minsky moment?