S&P 500 up in July on great earnings and fading global risks; US macro headwinds remain

- "In July, the S&P 500 rebounded +7% off its 2010 low as global risks receded and 2Q
earnings surprised strongly to the upside. Stocks that generated positive earnings
surprises through better-than-expected sales outperformed firms posting positive
EPS surprises achieved through better margins. Macro headwinds remain in the
form of decelerating US economic growth and persistently high unemployment rate."

GoldmanSachs US Monthly Chartbook 20100804

China: “The Leading Indicator of the Leading Indicators?”

- Leading Indicator? — "The Chinese equity market has shown signs of ‘leading’ global equity markets at turning points over the past three years (the late-2007 peak, the late-2008 trough and the recent peak in markets at end-2009/start-2010); as a result, the 13% rally in the Shanghai Composite since early-July has been a major support for improved overall global sentiment over the past month."
- Biggest GEM — "Not surprisingly, China is now the biggest emerging market in the world, accounting for 18.6% of MSCI GEMs currently, up from 6.5% in mid-2000."
- Structural Change — "The big rise in China’s weight in global markets over the past decade is unrelated to market performance and is explained mainly by definitional changes to the shares included in the major indices (the Red Chips entered MSCI GEMs in June 2000) and to a huge rise in new listings over recent years."
- Why? — "China’ s leading indicator role may be explained by: i) the sheer size of its economy; ii) China’s role as, by far, the biggest consumer of commodities in the world (around 40% for some and close to 70% for iron ore); and iii) the recent tendency of the large Chinese equity market to move to extremes."
- Normalization — "The slowdown in the Chinese economy should continue, cutting year-on-year GDP growth to a trough of around 8% in 2011 Q1 – still, not a ‘hard landing’. Given that and inflation at around 3%, our China macro team expects policy to move to Neutral in the second half of 2010 with no rate hikes at all."
- China Strategy — "Our Chinese strategist, Minggao Shen, has turned more positive and expects the Shanghai Composite to rally by a further 5-15% to 2,800-3,100 by end-2010, based on: i) the economic slowdown being largely priced in; ii) policy headwinds are easing; iii) the massive liquidity drain in H1 2010 from the flood of IPOs etc. has likely ended; and iv) margin squeeze may have peaked."
- Asia Strategy — "Our Asian strategist, Markus Rosgen, has cut the size of his Underweight in China, on more attractive valuations and a slightly more bullish view on regional real estate; he looks to add to the market over the summer."
- GEMs Strategy — "We are currently Neutral in China in our GEMs portfolio. Given the analysis in this report, the recent strong rally in Chinese equities is important for global equities as a whole. However, with emerging markets looking somewhat overbought short-term, we also look to add to China mainly on weakness."
- Bullish — "Based on ‘no double-dip’ scenario, solid growth in emerging markets, low interest rates ‘for longer’ and attractive valuations, we remain bullish on emerging markets for the long-term (including on Chinese equities)."

Citigroup Global Emerging Markets Strategy 20100803

Japan: August 2010-Major rebound for equities globally, particularly in southern Europe

- S&P Global Equity Index up 5.8% in July — "Global equities rebounded sharply in July after the release of EU bank stress test results. As we had expected, the BCBS eased its draft regulations, which resulted in significant growth for bank stocks globally."
- Greek crisis calming — "Equities grew sharply in southern Europe and developing markets. Growth in southern Europe was led by Greece (+21.4% in July), Spain (+14.0%), Portugal (+4.1%), and Italy (+8.3%)."
- Japanese equities up just 1.0% in July — "However, on a dollar basis Japanese equities were relatively strong. The dollar-based S&P Japan Equity Index is up 1.6% YTD (but down 5.5% in yen terms). By comparison, the US Equity Index is up 0.8% and the Europe Equity Index is down 5.7% (dollar base for both)."
- Long-term yen appreciation risk — "The yen-dollar rate is firmly in the ¥80$-¥90/$ range. The yen has strengthened over the long term, from a July 1998 low of ¥147/$ to ¥85/$ in November 2009. Even if the yen falls into the ¥70/$-¥80/$ range, the government and/or BoJ may not intervene in the forex market."
- Asia-related stocks, domestic demand stocks likely to benefit from deregulation
— "China and other Asian economies are doing relatively well, so we recommend making China-related stocks (machinery, autos, trading firms, marine transport) the core of one's investment portfolio. We also expect to see deregulation in the tourism, real estate, and communications sectors, so domestic-demand stocks could be attractive as well."
- Beneficiaries — "We think beneficiaries of current trends include 1) Komatsu (machinery), a global infrastructure-related stock; 2) Unicharm (personal care), a core Asia-related stock; 3) Nidec (electronic machinery); Rakuten (consumer cyclical), a domestic demand-related stock with high growth potential; and ANA (transportation), which should benefit from moves to nurture the tourism industry."

Citigroup Japan Portfolio Strategist 20100802

Europe strikes back

- "In the US the FOMC meeting is the main event next week. We believe that the
speculations about further monetary easing are premature, but that the assessment of the current economic situation will be downgraded. We expect US July retail sales to increase 0.5% m/m after a weak H1 2010."
- "For the euro area, the key event next week is expected to be the release of Q2 GDP data. We expect to see robust growth, but at a rather uneven pace. Germany is expected to stand out as the top-performer."
- "UK inflation report on Wednesday is expected to weigh on GBP and support Gilts."
- "In Scandinavia focus turns to inflation numbers out of Denmark, Sweden and Norway. The monetary policy meeting in Norges Bank will not attract much attention. Unchanged rates are widely expected."
- "Over the past month the euro area has been the main provider of good news while US data have disappointed. The German Ifo index, German factory orders and Euro PMI all surprised to the upside, while US data covering housing, business and consumption have all been weak."
- "The relative stronger numbers out of the euro area relative to the US and less PIIGS
concern have pushed EUR/USD above 1.32."
- "Wheat prices rise strongly on Russian drought and subsequent export ban. A new food
crisis cannot be ruled out if the export ban spreads to other countries like we saw in 2008. However, global wheat stocks are in fact plenty and other grains prices are not rising to the same degree."

DenDanske Weekly Focus 20100806