Monday, August 13th, 2012

Multi Asset Model Commentary 13/08/2012

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

Market conditions

Normality will start to return to the London markets this week, and the first task will be to work out exactly what Mario Draghi meant in “that” ECB press conference. The sell-off in May is beginning to fade into the distance. Investors have been so pessimistic of late, that further negative newsflow is required to push risk assets down. Without it, equity markets will continue to drift upwards over the next few weeks. Committed bears will welcome this as a chance to sell higher up in September. For the time being it suits everybody if risk assets rise and haven assets fall. The only curiosity in all this is the 2% sell off it US REITs last week, which was probably caused by the rebalancing of one of the major indices.

Current positions

Within the portfolio, the balance between risk-on and risk-off has hardly altered, but there has been a big move out of US Treasuries and into Investment Grade corporate bonds. The strong momentum over the last quarter has left Treasuries vulnerable to profit-taking from traditionally-minded investors. Investors with a bullish frame of mind will be pleased to note that a move into corporate bonds often precedes a move into US equities and other risk assets, all of which have seen their weights rise slightly over the last two weeks.

Outlook

If you believe that the Eurozone authorities have the will and the power to stabilise yields in the periphery, then you probably also believe that risk assets will rise over the next few weeks. This is not because the economic situation is likely to improve much, if at all. It is just the threat of imminent disaster being removed. This trade – a marginal tendency to increase risk exposure – looks like the path of least resistance until mid September, when the ECB and other central banks will be required to answer the questions they dodged in late July.

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