Risk off, risk on again?

Just as I was preparing to analyse how much further US Treasury yields can fall, they staged a remarkable rebound the past week on stronger-than-expected data on employment and manufacturing in the US. The 10 year T-bond yield surged from a intra-week low of 2.46% to close the week above 2.7%.

The two most important data over the past week were the US non-farm payroll and the ISM Manufacturing index. Both came in better than expected. Also, in Asia, China and India continued to show strong momentum. China's PMI rose to 51.7 in August, marking an end to three consecutive months of declines and also the 18th straight month the index is above the boom-bust level of 50. India reported GDP growth of 8.8% in 2Q10 vs. 2Q09. Expansion in the manufacturing and services drove India's growth rate to its fastest pace since 2008.

So is it "risk on" again? The short answer is no as we do not expect these data to mark the bottom of the current mid-cycle. We should be expecting a further tug of war between strength and weakness in the global economy to play out for the next few quarters.

Ultimately, we see low rates and yields co-existing with a mildly bullish equities market as central banks remain accommodative and the global economy avoids another recession to chug along. In this "new normal", we expect capital to search for markets with superior growth as well as yield differential. We believe a focus on emerging markets assets with a buy on weakness strategy to yield absolute positive returns over the next year or so.