Autopilot shutdown

The latest survey by the American Automobile Association showed that 73% of Americans don’t trust self-driving cars. This might help explain the December car crash in financial markets, after Federal Reserve Chair Jay Powell claimed that the central bank’s balance sheet reduction program was on “autopilot.” But the Fed has now clarified that its hands are on the wheel, and that it might hit the brakes on rate hikes. Rhetoric on US-China trade has also become more positive, and China has taken steps to stimulate its economy. The impact of this charm offensive has been enough to help markets recover from their December lows despite the fact that two of the world’s leading democracies are effectively, or literally, shut down.

Read the full monthly letter by UBS Chief Investment Office

Economic backdrop has weakened

Economic data has worsened since last month’s letter. But although we have been surprised at the rate of the slowdown in recent months, markets have adjusted quickly, and the strong performance of the US labor market as well as widespread stimulus in China keep us confident that growth, while slowing, is not stopping.

Watching for policy surprises

Against a backdrop of slower growth, markets are more sensitive to Fed and US government policy. Investors need to prepare for potential policy disappointments, while also staying alert for opportunities that mispricing could present.

Fed – turning off autopilot

The Fed has reassured that it remains data-dependent and can afford to be "patient and flexible." But given the current interest rate and labor market backdrop, it might not take much of an improvement in economic data for hikes to resume.

US-China trade policy

The new year has seen a more positive tone on trade, but we should still expect drama along the way and remain skeptical of a substantive deal.


A disorderly Brexit could unsettle financial markets, but current political and market momentum seems to point to a softer Brexit.

Key date

Federal Open Market Committee press conference

Key date

Tariffs on USD 200bn of Chinese goods due to rise to 25%

Key date

Alternative Brexit plan presented by Prime Minister May

Tactical asset allocation

Against this backdrop, we maintain an overweight position in global equities, but reduce portfolio risk at the margin by reducing our position in EM sovereign bonds. And, for those who can invest in options, we recommend a put on the S&P 500 to mitigate the risk of negative policy shocks or economic surprises.

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