J.P Morgan The J.P. Morgan View Will Europe be able to circle the wagons? • Asset Allocation —Greater political risk in Europe force us to reduce equity longs, while staying in credit, in ow asset allocation portfolio. • Economics — Weaker data for April delay the expected bounce back in the Chinese economy. Global growth forecasts unchanged from January. • Fixed Income — We add to Euro area hedges. • Equities — Stay long US vs. Euro area equities. • Credit — We continue to favour US credit and hold NEXGEM markets in EM. • Foreign exchange — Add to USD longs, as adverse Greek news should push the euro down much more than upside created by positive Greek news. • Commodities — Higher oil prices in H2, but with elevated two-sided risks. • Equity and commodity markets are down this week, and bonds and the dollar are up on political paralysis in Greece and weaker Chinese economic data. Credit, in contrast, performed better than other risk markets with spreads only a few basis points wider, largely offset by lower underlying bond yields. • Over the past month, equities are now down some 7%. though still up on the year (chart on right). This is close to the limit of what one can call a profit- taking correction, and now risks turning into a broader and deeper downside move. Relative to where we were a few weeks ago, there is now a near-term downside risk, but signals for 3.6 months out still sound positive to us. This suggests retaining upside exposure to equities and credit, while flat on commodities and bonds, focusing on the US market where there is least downside risk, adding some near-term downside protection, and keeping overall tactical risk below average. In our own GMOS asset allocation model portfolio, we cut the equity long position in half, while keeping net long exposures in credit. • How does one gauge the various forces driving risk markets? Starting with the economy, our 2012 and 2013 growth forecasts, at 2.2% and 2.6%, remain U