US equities ended almost flat, with the S&P 500 closing 0.1% lower. The stronger performance from financials following better-than-expected results from banking heavyweights Deutsche and UBS, and plans by the Basel Committee on Banking Supervision to allow less strict capital and liquidity requirements for banks by a later implementation date of 2018, were offset by a decline in the Conference Board Consumer Confidence Index for July to 50.4, from 53.4 in June. On a more positive note, US home prices gained more than expected in May by 4.6% year-on-year, according to the S&P/Case Shiller Home Price Index.
In our Global Research Monthly, we reiterate that a double dip is an unlikely event, especially on a global scale. Global economic indicators and data have weakened and are pointing to slower momentum, but we view the decline in momentum as a normal development, following an unsustainably strong pickup in activity for much of 2009. Short-term interest rates in many countries are also likely to stay near zero or very low into 2012 as a stimulus to offset fiscal cuts and reflecting low inflation. With bond yields and deposit rates low, it pays to stay strategically overweight equities, especially given that the valuation, the Cycle Clock and the overall earnings cycle are supportive. However, given the headwinds from weakening macro and earnings momentum through the course of the summer months, we recommend a neutral tactical stance until more decisive catalysts emerge. We would look out for: 1) a pickup in volumes and an upturn in overall risk appetite; and 2) from a bottom-up perspective, management guidance on the level of cash reserves to be deployed and to what extent cost-cutting is slowing at the margin, in order to gauge the nature of the economic recovery.
In terms of sector allocation, our sector scorecard indicators suggest that the rotation towards higher-yielding low-volatility sectors over the past three months may have run its course and that we may now see the beginnings of a move towards riskier, economically sensitive sectors. This explains our recent upgrade of the materials sector to overweight and rating downgrade for the more defensive telecoms and pharmaceuticals sectors.
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