Sumary

• Asset returns were mixed in Q3, with US equities leading, but other markets lagging, as investors digested the risks from emerging markets, Italian politics and advancing trade protectionism.

• Equities and bond yields rose towards the end of the quarter, suggesting that markets had become less preoccupied about these risks.

• Nonetheless, we still expect risks associated with US-China trade tensions, Italian politics and US monetary policy normalisation to weigh on markets in Q4 and into 2019. 

Asset allocation

• We remain selectively long risk assets and underweight fixed income, but have reduced overall risk and are managing positions more tactically.

• We have made the following adjustments to asset allocation:

• (i) We remain structurally underweight EMU bonds, but have taken advantage of yield volatility, first increasing and then trimming our underweight tactically, taking profits as German Bund yields rose.

• (ii) We closed our long Japanese equity exposure, which was an unhedged position, so the rally in equities was offset by losses from a weaker yen.

• (iii) Having reduced risk, we have less need to hedge against negative global shocks, so we have closed our short EUR/JPY position.

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