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Lyxor Cross Asset Research Q4 2019: Cut Risk Into Year-End

A tug-of-war between macro and liquidity Markets are again flirting near historical highs. The trade war escalation continues to weigh on market sentiment while the rates pullback is underpinning risky assets’ valuations. Macro readings point to a growth deceleration as manufacturing has entered recession territory and services are edging down. The manufacturing slump should worsen in the short run, with growth bottoming out only in early 2020. Corporate profit expectations are likely to be revised down as growth sputters and tariffs hit margins. The Federal Reserve (the “Fed”) may be reluctant to cut rates to match what the market has priced in as a recession is not around the corner yet. Meanwhile, the European Central Bank (“ECB”) is keen to pass the baton on to fiscal policymakers given weak demand. By geographic area, China’s economy is deteriorating further, suggesting yet again additional easing measures to support consumption and investment; Brexit remains a wild card with PM Johnson threatening a “do or die” no-deal exit on October 31; and heightened tensions in the Middle East and surging oil prices bring additional headwinds to global growth. Our investment recommendations are based on a short-term global slowdown and then stabilization – not a recession – in the U.S. and Europe...

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