The heart of the mater – new monetarism and the end of QE

Central banks have a good chance (80% or so) of controlling the reduction in their balance sheets and normalisation of interest rates without causing a massive exogenous shock to the financial system and real economy. The bottom line of this analysis for investors is to be short the US dollar versus the euro. European sovereigns (Germany, France and to a lesser extent Italy) are our preferred bond shorts. And European equities are our favoured long equity position. We would be cautious on short US Treasury and long US equity positions.

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