LONDON: Investors have entered the third quarter anticipating a somewhat calmer investment climate than the previous three months as focus shifts back to the underlying strength of the global economy and corporate earnings, Reuters reports on Friday, July 1.
World stocks, measured by MSCI, have barely moved in the three months to end-June in volatile trading that saw the index hit a three-year high only to fall nearly 8 percent subsequently.
Concerns about the impact on the banking sector from a potential default on Greek sovereign debt and an economic slowdown in the United States and China have encouraged investors to cut back on risks.
These worries have not gone away but the worst of the investor fears did not materialize. Greece has averted an immediate default by securing emergency funds and accelerating factory activity in the U.S. Midwest raised expectations for a pick-up in economic growth later this year.
"As financial market sentiment was overly pessimistic at the end of the second quarter and our tactical market sentiment indicators sent several buy signals, we expect to see a recovery at the beginning of the third quarter," said Philip Bartschi, chairman of the investment committee at Bank Sarasin.
Bartschi advised investors however to keep a defensive portfolio as earnings estimates may need to be downgraded.
For the second quarter, S&P 500 companies are expected to post earnings growth of 13.7 percent, down from an estimate for a 19.8 percent gain made last year, according to Reuters data. Earnings growth is expected to accelerate to levels above 17 percent in the third and fourth quarter before easing in 2012.
Q3 RISK TAKING
Flows point to a gradual return to risky assets. Reuters global asset allocation polls showed investors raised equity holdings in June for the first time since January and boosted their exposure to euro zone stocks and bonds.
Lipper survey showed U.S. money market mutual funds suffered net redemptions in four of the last five weeks, with $20.8 billion flowing out of this asset class in the week to June 29.
"The backdrop is gradually improving. We find that most investors are cautious, if not outright negative, and light on risk. We have started to add pro-cyclical positions for the first time in two months," Goldman Sachs said in a note to clients.
Over the coming week, the European Central Bank is expected to deliver another interest rate hike. U.S. monthly jobs data would be key in determining whether the data soft patch is coming to an end.
The favorable backdrop for risk taking would add pressure on government bonds, especially in the United States where the Federal Reserve ended its $600 billion bond buying program.
Ten-year U.S. Treasury yields rose to a 1-1/2 month high of 3.18 on Thursday, with investors jittery about the Aug 2 deadline for Congress to raise debt ceiling to avoid a default on the $14.3 trillion debt.
S&P said on Thursday it would downgrade the United States from AAA to D if it missed its debt payment on Aug 4, two days after the Aug 2 date the Treasury Department has given as the deadline for raising the debt ceiling.
A Senate Democratic aid told Reuters on Thursday Senate Democrats have discussed with President Barack Obama a scaled-back budget deal that would avert a default but force Congress to tackle the politically toxic issue again before the 2012 elections.
The White House believes a deal needs to be in place by July 22 to give Congress enough time to pass it, according to Democratic officials.
"The risk is that the market may focus more on the debt ceiling debate, where a progress has stalled a little, if other risks begin to recede," Goldman said in a note to clients. - Reuters
World stocks, measured by MSCI, have barely moved in the three months to end-June in volatile trading that saw the index hit a three-year high only to fall nearly 8 percent subsequently.
Concerns about the impact on the banking sector from a potential default on Greek sovereign debt and an economic slowdown in the United States and China have encouraged investors to cut back on risks.
These worries have not gone away but the worst of the investor fears did not materialize. Greece has averted an immediate default by securing emergency funds and accelerating factory activity in the U.S. Midwest raised expectations for a pick-up in economic growth later this year.
"As financial market sentiment was overly pessimistic at the end of the second quarter and our tactical market sentiment indicators sent several buy signals, we expect to see a recovery at the beginning of the third quarter," said Philip Bartschi, chairman of the investment committee at Bank Sarasin.
Bartschi advised investors however to keep a defensive portfolio as earnings estimates may need to be downgraded.
For the second quarter, S&P 500 companies are expected to post earnings growth of 13.7 percent, down from an estimate for a 19.8 percent gain made last year, according to Reuters data. Earnings growth is expected to accelerate to levels above 17 percent in the third and fourth quarter before easing in 2012.
Q3 RISK TAKING
Flows point to a gradual return to risky assets. Reuters global asset allocation polls showed investors raised equity holdings in June for the first time since January and boosted their exposure to euro zone stocks and bonds.
Lipper survey showed U.S. money market mutual funds suffered net redemptions in four of the last five weeks, with $20.8 billion flowing out of this asset class in the week to June 29.
"The backdrop is gradually improving. We find that most investors are cautious, if not outright negative, and light on risk. We have started to add pro-cyclical positions for the first time in two months," Goldman Sachs said in a note to clients.
Over the coming week, the European Central Bank is expected to deliver another interest rate hike. U.S. monthly jobs data would be key in determining whether the data soft patch is coming to an end.
The favorable backdrop for risk taking would add pressure on government bonds, especially in the United States where the Federal Reserve ended its $600 billion bond buying program.
Ten-year U.S. Treasury yields rose to a 1-1/2 month high of 3.18 on Thursday, with investors jittery about the Aug 2 deadline for Congress to raise debt ceiling to avoid a default on the $14.3 trillion debt.
S&P said on Thursday it would downgrade the United States from AAA to D if it missed its debt payment on Aug 4, two days after the Aug 2 date the Treasury Department has given as the deadline for raising the debt ceiling.
A Senate Democratic aid told Reuters on Thursday Senate Democrats have discussed with President Barack Obama a scaled-back budget deal that would avert a default but force Congress to tackle the politically toxic issue again before the 2012 elections.
The White House believes a deal needs to be in place by July 22 to give Congress enough time to pass it, according to Democratic officials.
"The risk is that the market may focus more on the debt ceiling debate, where a progress has stalled a little, if other risks begin to recede," Goldman said in a note to clients. - Reuters
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