Tuesday, June 21, 2011

Nomura: How Much Of A US Slowdown Is In The Price?

Interesting observations by strategists at Nomura today:

While June ISM risks are skewed to the downside, growth-related assets seem to be underestimating the possibility of a disappointing outcome. Figure 1 compares the ISM index with the year-on-year changes in our common measure of US market-implied growth, which we define as the first component of a PCA on a group of US growth-related assets. It is apparent that after months of relative pessimism the market is now trying to look through the recent data and view it as a transitory slowdown. As such, growth assets appear vulnerable to further disappointing data in June. Currently, on this simplistic measure the market implies an ISM of roughly 57.0 vs our economists forecast of 51.8 and the Philly Fed's dismal ISM-equivalent reading of 45.5.

While buying Treasuries and selling stocks would be the natural trade to position for a deeper-than-expected ISM dip, optimising this trade could be key given current valuations. Figure 2 looks at the relative mispricing of each asset with respect to the common US growth component. Clearly, while Treasuries would benefit from a disappointing growth outcome, yields already appear too low compared with the rest of the assets in our universe and arguably offer only a limited reward. Conversely, S&P Consumer services, oil and copper still appear too optimistic with respect to growth, despite their recent retrenchment, and thus offer an interesting trade for investors positioning for a longer and deeper "soft patch" than currently expected.

Click on charts to enlarge, courtesy of Nomura.

Well, markets seem to be focused on "technically oversold" conditions and Greek "victory" today...

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