Cash is king as investors walk the line. This is one of the eye-catching headlines in the just-published global fund manager survey from Bank of America Merrill Lynch, just one of a rash of comments made today by investment specialists suggesting markets are on the turn.
Risk appetite remains equivocal with global cash balances still high at 4.9% despite a clear inflection point lower in global growth/earnings per share estimates.
Fund managers are also taking out more protection. Asked why, 45% of those who responded highlighted a bearish view on markets.
Bond markets and Fed/ECB most likely sources of hurt
A bond market crash and/or Federal Reserve/European Central Bank policy mistake are seen as most likely to leave markets in troublesome waters. One such trigger could be the upcoming Fed balance sheet reduction.
A notable minority of 31% think this could be a risk-off event pushing bond yields higher and equities lower. Yet until 10-year Treasury yields climb the wall of 3%, few investors think Treasuries will cause an equity bear market (currently 2.32%).
- Investors turn incrementally more cautious on macro
- Cash stays king on fears of a market correction
- Bond markets and Fed/ECB most likely sources of any hurt
- But not unless 10-year Treasury pushes past 3%
- Eurozone: allocation still at contrarian high
- Banks join tech as most overweight equity sectors
- Staples/bond proxies least loved
Eurozone: macro optimism wanes, ECB's inflation blues?
Investors have tempered their optimism on European macro, notably earnings expectations. A net 54% expect higher earnings per share growth over the next 12 months versus 64% last month.
By contrast, a net 78% expect inflation to rise and a net 65% said monetary policy is too stimulative (the April 2017 peak was 68%), putting European Central Bank president Draghi's signalling powers to the test.
“Fund managers’ biggest fears are a shock coming from bond markets or central banks,” said Michael Hartnett, chief investment strategist. “Too many investors see the Fed as a likely negative catalyst.”
Euro/US dollar interesting
Jordan Hiscott, chief trader at currency trading specialist ayondo markets, cites president Draghi as one of the reasons why it is an interesting time for the euro/US dollar currency trade.
Speculative shorts have dramatically reduced as mean reversion traders get caught on the extended move higher. One catalyst has been the prediction that Mario Draghi will take a hawkish approach at the ECB rate meeting on Thursday, he suggests.
“Could the possibility of starting a tapering of sorts as early as September derail the fragile positive growth sentiment we have seen recently?” he asks.