J.P Morgan he J.P. Morgan View The paradox of austerity • Asset Allocation — The shallowness of the correction in risk assets and the lack of a convincing reason to go short will likely pull investors back in, creating further upside over coming months. • Economics — Data are tracking a mild deceleration of global growth in Q2, driven by excess inventories. Solid consumption data are telling us this slowdown should be temporary and are setting us up for better growth in H2. • Fixed Income — Flat duration, bearish on Euro area peripherals. • Equities — The reporting season is delivering significant positive surprises in both the US and Europe. • Credit — We move to marketweight EMS sovereigns overall although NEXGEM sovereigns offer a good investment opportunity. Foreign exchange — BoJ easing should keep USD/JPY in low 80s. • Commodities —Central bank buying still supporting gold. • Risk markets rebounded this week on continued good US earnings, a sup- portive FOMC, and an OK Italian bond auction. The dollar eased modestly in line with its safe-asset image, while bonds are largely unchanged. Global equities remain about 2% below their YTD peak in March. Given the news flow this week, which contained a lot of political fireworks from Europe and an upside surprise on US claims, one would have expected risk markets to have traded lower this week. We like to interpret the upmove as supporting our view that the main driver of this year's rally in credit and equities will not be a surplus of good news, but a lack of enough bad news relative to the risks that already priced into markets. To put this into Finance jargon, risk is high, but risk premia are even higher. • This strategy depends on the Value force which we know does not work reliably from week to week, but has to be assessed on a 3.12 month basis. A lot of more tactical players have covered their longs in risk assets recently, on event risk in Europe, and so have many of our product