The Q3 asset allocation is nearly completed. Bonds have performed better than many expected and equities over a 12m horizon are well priced. With the European recovery confirming stronger signals, continued market strength requires participants to confirm an improving global picture, that requires a longer subdued inflation outlook, US fiscal expansion as necessary and a dollar adjustment that balances emerging market recovery and developed market sustainability over a 2 year horizon. Curve shape remains a difficult connundrum, look for supply constraint for further normalisation.
Currently the race leader remains the USD, a clear break out with little new impactful data. Financial spreads and data will have to add support in a timely manner. Consolidation supporters will look for budget impasses, delays in infrastructure spending and unnecessary volatility to delay progress. Do not let this cloud the improvement, a firm conviction on low inflation and corporate growth thru Asia will be enough to deliver a merry Xmas.
Position in higher return EM exposure to capture the complete move, or stay invested in European equities for sustained returns, the hot call is financials, so much money that needs to be banked but looks like a lousy deposit rate for equivalent exposure on reinvestment. Watch for inflation carefully, the central bank can still steal your bonus.
