J.P. Morgan The J.P. Morgan View Patience during political season • Asset allocation — No changes in our medium-term, value-focused strategy to he long assets with high risk premia, equities, credit, and carry trades, even as upcoming political events will likely create shorter-term volatility. • Economics — No major forecast changes, although increasing uncertainty around US fiscal cliff posturing creates downside risk on US Q4 and Ql. Fixed Income — We prefer German Binds to US Treasuries. • Equities —US earnings season favors domestically-oriented stocks and US Financials. Credit — We expect further spread tightening in US HG as the lack of credit supply brought about by QE3 is not fully priced in. • Currencies — We launch a Chinese Economic Surprise Index. • Commodities — Stay long Brent time spreads on Middle East uncertainty. Equity markets are trading heavy, and are giving back most of their gains of the past 1.2 weeks, despite no clear change in fundamentals. Other risk markets, such as credit, commodities, and the euro periphery, are not following equities this time, indicating we are largely seeing profit taking after the hefty rally in stocks over the last four months. There are no meaningful changes in growth forecasts this week, except for moving 1% in growth from Q4 to Q3 in the Euro area, due to better IP data in Q3 which we do not think will last. But as a result, global growth in Q4 at 2% is now barely different from the previous two quarters. In GDP terms, there is not as much sign of a rebound as we had hoped, even as the underlying PM1 orders and inventory data do hint at this coming rebound. • We are only at the beginning of the Q3 earnings season, but what we have is in line with subdued expectations for small oya drops. Profit margins then hit new highs and world growth has since fallen below potential. But global equities are up 10%. Why? We have argued that equities and other risk markets can rally despite lackl