Monday, June 11th, 2012

Multi Asset Model Commentary 11/06/2012

(This commentary was written originally specifically for the US Dollar Multi-Asset Model)

Market conditions

These recommendations are based on prices which do not reflect the confirmation of the Spanish bank rescue, details of which are still being released, though clearly some of this news was already in the price by the end of last week. So the question arises, “Are they already out of date?” We think not. The soap opera that is the euro-crisis has merely reached the end of an episode. Tune in next week to see if the Greeks have elected a government. In case we appear overly pessimistic, we think the Spanish deal is good news; but its impact on the dynamics of risk and return is marginal.

Current positions

There is virtually no change to the portfolio which results from last week’s newsflow, a classic illustration of the importance of ignoring the press, in a well-constructed investment process. US Treasuries account for almost half the portfolio, with US REITS and investment grade credit in the second and third place. US equity exposure is now less than 10%, with emerging markets and commodities almost unrepresented.

Outlook

We still have not had any intervention from central banks in the developed world. This is now unlikely to come before the Greek elections, and we suspect that the ECB and others will want to see the considered reaction to the Spanish deal before taking any action. If these interventions are to be effective they would need to be so large as to distort the currency markets, unless all central banks including the Fed and the BoE (and possibly the PBoC and BoJ) intervene at the same time.  In the meantime we note that volatility in the US treasury market is clearly on the rise, even though it is falling in most risk assets apart from commodities.

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