A turn in the U.S economy - what now for 2010?

With data flow increasingly indicating that the major economies of the world are either already out of recession or close to it, the period of unprecedented economic stimulation and low interest rates may be coming to an end. Although the Federal Reserve is unlikely to increase interest rates quickly, it would not be unexpected that rates would be on the increase in the second half of 2010.

With a tightening of interest rates on the medium term horizon what does this mean in relation to certain sectors:

1. The down spiral of the dollar against other major currencies will certainly end. Currently investors can borrow at very low U.S. rates and invest elsewhere in the world for greater returns, the so called "carry trade". If U.S. interest rates rise in 2010 this should have the effect of stabilising the dollar and reducing returns on the carry trade. If the U.S. government  acts to get the deficit under control as the country comes out of recession this will accelerate the strengthening of the dollar.

Trade: buy U.S. dollar

2. The earnings of the major financials such as Goldman, JP Morgan, Barclays, Credit Suisse have been helped in recent quarters by the low cost of borrowing and the demise of competitor institutions such as Lehman Brothers. As interest rates rise, making money by borrowing cheap money gets harder.

Trade: Cautious shorts on financial stocks

3. There has been a huge move into gold as fears of hyperinflation grow and as a hedge against the weak U.S. dollar. If the U.S. dollar strengthens this should pressure this trade. Unlike copper, platinum and other precious industrial metals, gold has limited commercial use (apart from Jewellery) and produces no income .

Trade: Short gold

4. Buy consumer sensitive stocks. As the global economy emerges from recession consumer sensitive stocks should do well e.g. P&G, Unilever