The Economy
The global economy is turning into 2013 with growth momentum building
modestly and financial conditions becoming more supportive. We forecast
GDP gains to pick up modestly over the course of this year, starting in the
current quarter.
Asset allocation
We analyze asset allocation in terms of seven major themes, or trades. We
stay long the risk-on, carry, and the Japanese reflation trades, with smaller
allocations to the long EM trade across asset classes. We are currently
neutral the short duration trade, the credit-into-equities rotation trade and
the commodity trade, awaiting the relevant signals before we switch into
these themes.

Cross asset volatility strategy
We favor trades with a long vol bias and positive carry. Sell 3m ATM
straddles on DJ-UBS Commodity Index and buy 3m ATM straddles on
Gold. Sell 3m ATM straddles on MSCI EM Index and buy 3m ATM
straddles on Eurostoxx50.

Fixed income
We are flat duration, and continue to focus most risk on overweighting
Euro area peripherals.

Credit
We stay up-in-yield, hedge duration risk and do not expect an imminent
rotation from credit to equities until investors start upgrading significantly
their growth and earnings projections.

Equities
We take profit on our UW in S&P500 vs. MSCI EMU given looming
Italian election risks. We focus the US equity underweight against EM
Asia and Japan. Favor Cyclical vs. Defensive sectors but reduce. Stay OW
the DJ US Home Construction Index and large mortgage banks (BKX
Index) vs. the S&P500 to position for a continued recovery in US housing.
Currencies
Stay short Yen.

Commodities
The lack of any rise in 2013 growth expectations keeps us neutral
commodities overall and we focus on relative value. We are long Brent
time spreads, natural gas, and base metals and short agriculture. We have
taken profits on our longstanding long in gold and are now neutral.