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Monthly Review : November

The economic momentum in the U.S. remains moderately positive. Relatively high inventories stand in the way of acceleration in manufacturing, while improvements in employment and real estate support consumer spending. We expect that major risks in connection to the “fiscal cliff" will be avoided.

In the Eurozone, the divergence between expectations inherent in the markets (optimistic) and the readings of most leading indicators (pessimistic) indicate a belief that the current economic slowdown is mainly due to the negative psychology created by the Eurozone crisis. Although there has been significant progress on the European front, markets at this stage may underestimate difficulties in applying many measures as well as the negative dynamics of the applied austerity policies.

The prospect of an expansionary policy in Japan may lead to a temporary boost in the economy and Chinese economic data improved only marginally, while the new leadership of the Communist Party has not yet made any substantial announcements about economic policy.

It is possible that we are entering a period of stable or even declining volatility, with a possible exception of a (temporary) spike related to the cliff in the U.S. At the same time, Eurozone risks could remain subdued during the lead-up to the German elections in September. On the Asian front developments in China are more likely to cause a positive than a negative surprise. Central banks’ commitment to continue to provide high liquidity at a time of slow positive growth is very important. The combination of these factors is consistent with a positive environment for risky securities for most of 2013.

American and European stocks display the most positive picture, while emerging equities (along with commodities) have not yet shown signs of stabilizing. The developments in Asia pose a risk to U.S. bonds while German ones could outperform. Recent developments have resulted in an upward momentum in the EURUSD cross and have reduced (but not removed) longer-term downside risks.