A see-saw year ahead for risky assets

We now think risky assets will generally fare quite well in the first half of 2013, as tension in the euro-zone continues to ease and the Fed expands its balance sheet further. We expect these factors to trump the threat posed by political brinkmanship over US fiscal policy. However, we assume that the crisis in the euro-zone will flare up again in the second half of the year, causing sentiment to sour temporarily. We therefore forecast the US stock market to end this year close to its current level and the 10-year US Treasury yield to drop back to 1.5%. We also expect the euro to cede ground, and the yen to recover, against the dollar.