US Senate leaders reached a last-minute deal on reopening the government and suspending the debt ceiling. As the debt limit is only extended by a few months, the relief will only be temporary. It is nevertheless a reason for us to increase our risk-on stance by upgrading equities, real estate and credits.
The improvement in economic fundamentals and the ongoing support from monetary policy are the main reasons why we held on to our growth oriented, moderate risk-on stance in the past weeks. Now that the deal is reached, we have increased our risk positions somewhat.
Markets have priced in a more dovish Fed outlook
Debt ceiling deal is a temporary relief
One day before the ‘infamous’ deadline of October 17, The US Senate and House of Representatives finally managed to pass a deal to get the government back to work and suspend the debt limit, albeit for a short time. The deal opens government again until January 15 and suspends the debt ceiling until February 7, 2014. It also requires negotiations to reduce the budget deficit to be completed by December 13. The automatic, across-the-board spending cuts (also known as sequestration) that began in March, were not lifted. The next round of cuts is due to take effect in January when the temporary spending measures end. Their removal is expected to be a key part of the budget negotiations.
Given the short window for successful budget negotiations the current deal has delivered, this chapter in American politics is not over yet. We may yet return to similar brinksmanship later this year or early next year.
Economic and corporate fundamentals give support
However, economic and corporate fundamentals continue to improve, while tapering seems to be postponed until 2014. The nomination of Yellen as the next Fed chair gives us every reason to believe in a ‘lower for longer’ monetary policy. European data surprise to the upside and also the Japanese recovery gains further traction. Emerging markets got some more room to breathe from the delay in tapering.
We have increased our risk-on positioning
The improvement in economic fundamentals and the ongoing support from monetary policy are also the main reasons why we held on to our growth oriented, moderate risk-on stance in the past weeks. Now that the deal is reached in the US, we have increased our risk positions somewhat. We upgraded our neutral positions in real estate equities and credits from neutral to overweight, while we moved equities from a small to a medium overweight position. Meanwhile we have moved government bonds from neutral back to a small underweight position.
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