Tail risks get thinner

Investors entered the autumn with great anxiety about the trade war and Brexit. Those risks have abated, and so have flight-to-quality flows. Headline risk into yearend includes trade war news (US, China, EU) and soft US employment data. Yet we don’t see those derailing market trends.

Highlights:

  • Investors entered the autumn with great anxiety about the trade war and Brexit. Those risks have abated, and so have flight-to-quality flows.
  • Headline risk into yearend includes trade war news (US, China, EU) and soft US employment data. Yet we don’t see those derailing market trends.
  • Equities continue to offer attractive earnings yields relative to bonds; it is hard to resist the appeal unless one fears a 2008- or 2011-like scenario.
  • For a similar duration, the EuroAggregate Corporate (IG) yields 50bp more than 6y Portugal (BBB). CSPP returns; we stay long Credit.
  • The USD is pulling back from the end-September peak. This too bodes well for risk conditions.

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TAIL RISKS GET THINNER

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