A Healthy Unwind (For Now)
Markets are still struggling for direction as investors seem to be unable to find any asset class that is actually performing. Although risk aversion is dominant, there appears to be very little interest in returning to short-term US or German paper, the dollar or even gold. Two main factors are at play: firstly, there is a realisation that extraordinary policy has probably run its course. On a technical level and based on macro conditions, major central banks will find it hard to ease beyond current measures. This limits adding to duration, gold/commodities and selling the dollar. Secondly and more importantly for the short-term, 2013 has already seen extraordinary flows into risk, driven by initial improvements in economic expectations and portfolio rotation (both active and policy-induced). Directionally these flows are justified, but were not commensurate to underlying fundamentals.
Read the full report: UBS