Bank of America: Will Wall Street Collapse in Summer ?

wall street

After Blackrock, now it’s the turn of Bank of America: everyone seems to believe that we will see a “stock melt-down” during next Summer in the US, let’s see what are the main points of their analysis


(original publishing date 05-26-14)

Summer will begin in less than a month, and yet people are already sweating.
No, we’re not talking about hot temperatures, it seems like there’s something hotter than that ahead of us: a stock melt-down.

We have already told you about Blackrock’s fear on stocks, now Bank of America Merrill Lynch Chief Investment Strategy Michael Hartnett is sure that we will see an aggressive sell-off in Summer.
Why ? Here’s his explanation:

“With 56% of the world economy under zero rate policies, $1.8 trillion in central bank liquidity in 2014, and the equity float set to decrease by $565 billion this year, the summer risk remains for a melt-up in stock, credit, and bond prices rather than a melt-down”

And what if we’ll see new all-time highs in Summer ?
“New summer highs in equities are likely to be aided and abetted by ‘irrational exuberance’ in both credit markets and carry trades. Zero rates continue to induce asset manias”
And guess what ? The real correction may arrive in Autumn:
“When the end of zero rates is threatened, likely this autumn as unemployment rates drop to uncomfortably low levels, both credit & stock markets should correct sharply”

Now, this is the future, let’s focus on the present for a moment.
We are now seeing a rotation (or “unrotation”) from stocks to bonds in the US, as BofAML points out:
Following the recent market volatility mutual fund and ETF investors sold stocks, reduced purchases of high grade and instead bought Treasury bonds last week (ending on May 21st). Long-term Treasury funds reported an inflow of $3.06bn, the highest since at least 2010. As flows tend to follow returns, the buying is consistent with the sharp decrease in interest rates last week. Some of this large buying of Treasuries appears to have come at the expense of  longer-dated high grade funds: inflows to high grade outside of short-term funds dropped by about $1bn relative to the prior week to a $0.85bn inflow. Inflows to short-term high grade funds also fell to $0.42bn last week from $0.82bn inflow in the prior week.

Still, the net effect was more flows into bonds, as inflows to all fixed income funds rose to $6.61bn last week from a $3.54bn inflow in the prior week. Equity  funds, on the other hand, reported a $7.10bn outflow last week, down from a $9.02bn inflow in the prior week. At the same time inflows to high yield funds rose to $0.73bn last week, driven by ETFs. Loan funds, on the other hand, continued to report outflows, totaling $0.36bn last week, while inflows to EM (+$0.51bn)  and munis (+$0.54bn) remained steady. Finally, flows for money market funds remained close to flat, with a $0.57bn outflow.


You may want to see it by yourselves: is everyone dropping stocks ? And why is everyone buying bonds ?
Easy: the general market sentiment is the following: “Stocks can’t go higher, bond prices will go up because as soon as Fed will start tightening”.
It’s the magic of finance, they call these beliefs: self-fulfilling profecies.



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