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A Trump Truce For A Sunset Ending Of 2018

We are still under the lasting impressions of an excruciating month of October followed by nerve-wracking month of November. Neither Halloween nor Thanksgiving gave us any respite. While we are still clearing the wreckage, we must remind ourselves that we are investing in the financial markets for the long term. More importantly, the shocks of the past two months have confirmed that market consolidations do happen occasionally – actually every 12-18 months – and this was the third, although the deepest this year.

The Fed has given some dovish tones which pleased the markets and they rallied strongly. Last week Mr. Powell stressed that rates were now just below the lower end of the Fed’s estimates of neutral — which runs from 2.5-3.5% — and that there is no preset course for policy. Policymakers laid out a remarkably broad list of “downside” risks to the expansion — among them unhealthily high corporate debt, the possibility of a waning boost from fiscal policy, tighter financial conditions, slowing overseas growth, further dollar strength and skirmishes over trade.

Instead of having ‘caved-in’ to Mr. Trump’s diatribes, as some commentators portray, we believe the Fed is now having to take greater account of these risks. It needs flexibility in its rate setting as it realizes that the US economy may be heading into a recession in late 2019 or early 2020. The Fed might then not have enough fire-power to reduce rates from the current (low) levels to stimulate the economy. It may even have to re-start Quantitative Easing, if all else fails. Markets certainly liked what they heard from last weekend’s G20 meeting in Argentina. After the initial fireworks died down, financial markets realized that a truce is not peace. A truce between Washington and Beijing that ices their dispute over trade, technology and other issues for 90 days, should therefore be viewed with some discernment. As the example with the EU shows, trade negotiations tend to be arduous and protracted. This may call Mr. Trump back onto center stage in the Spring.

For now, though, we can also add renewed efforts by Opec and Russia to place a floor under the oil price, an important development and one that may heThe bounce we are seeing in prices across markets likely has scope to run some way and perhaps for the rest of the year as the finish line for 2018 is now within sight. Year-end market rallies are a strong seasonal trend and we have a following breeze for risk sentiment.lp the US high-yield debt sector finish 2018 as one of the few fixed-income markets in positive territory.

If you would like to discuss any of the points mentioned above or would like an assessment of you current portfolio or guidance on how to position your portfolio, please drop us a line.

Switzerland, December 4th, 2018

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