Posted by on July 7, 2017 4:05 pm
Tags: , , , , , , , , , , , , , , , , , , , , , ,
Categories: Banking Bond Business central bank Central Banks Corporate bond Economy European Central Bank Finance Financial market Financial services Fixed income germany High Yield High-yield debt Interest rate japan Monetary Policy money Swiss Government US Federal Reserve Volatility Yield Curve

One week after BofA’s Michael Hartnett became the latest strategist to admit the truth, when in his Flow Show report from last week he said that “central banks have exacerbated inequality via Wall St inflation & Main St deflation” and now that they are hoping to quickly and painlessly undo their error, there are “two ways to cure inequality…you can make the poor richer…or you can make the rich poorer…” concluding that the “Fed/ECB are now tightening to make Wall St poorer” because it is “no longer politically acceptable to stoke Wall St bubble”, he has followed up with a note in which he looks at the vast change in the market landscape over the past year.

As he says, one year ago, July 11th, 2016, 30-year Treasury yield hit all-time low (2.14%), and Swiss government could have issued a 50-year bond at a negative yield (Chart 2 shows 10- year Swiss yield back to 1900).

One year later, 10-year bond yields up from 1.43% to 2.37% in the US, from -0.27% to 0.10% in Japan, and from -0.17% to 0.56% in Germany. Over the same period, global equity full float market cap rose $10.0tn to $76.3tn.

Then in a follow up from his recent report predicting when the Fed may be preparing to finally open the trapdoor beneath the market, the BofA analyst writes that over the next 6 months, higher interest rates likely be “much more negative for stocks & credit given new central bank policies“; tightening by the Fed, rhetorical tightening by ECB has already succeeded in raising bond yields, volatility, reducing tech stocks, he says as he urges clients to slowly step away from the exits.

And, when looking at near-term catalysts, he views the summer of 2017 as a “massive inflection point in central bank liquidity trade…will likely lead to “Humpty-Dumpty” big fall in market in autumn, in our view.” The outcome of this global coordinated tightening, as he has shown below, will be a “financial event”

In addition to central bank liquidity, two other factors that Hartnett believes will force a market inflection point are corporate bonds & profits which are rolling over: “key for timing the big top in risk assets in autumn: credit markets remain strong, but note US high yield has lagged high grade since March (and note disconnect with European credit markets – Chart 4).”

Finally, he adds that while corporate profit growth has accelerated (Chart 5), the disconnect with payroll growth is notable; further weak payroll growth would hint at profit top and policy mistake.

In summary:

In past 12 months, 10-year Treasury yield up almost 100bps, global equity market cap up $10tn.

Next 6 months higher interest rates likely much more negative for stocks & credit given new central bank policies; flows show “lust for growth” under pressure in stocks, but “lust for yield” unbroken in bonds. Corporate bonds & profits key for timing the big top in risk assets in autumn

Leave a Reply

Your email address will not be published. Required fields are marked *