From: US GIO <[email protected]> To: Undisclosed recipients:; Subject: The J.P. Morgan View: How bad a correction? Date: Sun, 08 Apr 2012 17:35:15 +0000 Attachments: JPM_TheJ.P._Morgan_View_2012-04-06_823728.pdf Inline-Images: ATT00001.gif 1,,D.P. Morgan Logo Global Asset Allocation The J.P. Morgan View: How bad a correction? Click here for the full Note and disclosures. • Asset Allocation — The fundamentals behind the rally in risk have not really changed. This should limit a position squaring correction in equities to 5-7%. We maintain O2 overweights in credit and equities. • Economics — Disappointing US Payrolls eliminate upside risk on US growth but would need to be repeated across a wide set of US data to make us lower growth projections and forecast QE3. • Fixed Income — With still no QE3 in our forecast, we retain a 2.5% 10--year UST forecast for mid year, and stay short duration in the US. We would add to the short if US yields fall further. • Equities — We do not see the reporting season acting as big catalyst near term. We remain medium-term long equities, overweighting the US. • Credit — We introduce a novel way to identify relative value between credit and equity volatility, based on statistical arbitrage. The signal is now neutral. • Foreign exchange — EUR/IUSD volatility is too low given fundings risk around Spain. • Commodities — Gasoline price pressures should ease over the next couple months as refinery maintenance comes to a close. • A disappointing US Payrolls report pushed equities down and bonds up in a week that was already in position squaring mood. By now, equities are about 3.5% down from the year high reached a few weeks ago. By itself, that is noise. Can it become a much more serious correction? • The magnitude of the eventual correction or reversal is a function of how extensive the overweight risk positions are, how much value has been exhausted, and how much the underlying fundamentals have or will still w