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'Buy in September', BofA-ML says

By Alexander Bueso

Date: Friday 16 Aug 2019

'Buy in September', BofA-ML says

(Sharecast News) - Strategists at Bank of America-Merrill Lynch sounded a 'bullish' note on stocks heading into September and for the longer-term.
Their main takeaway was that with the shocks seen from the deleveraging that followed the inversion of the Treasury yield curve and the dislocations in Argentine financial markets - after the country's bond bubble popped - now over and given 'bearish' positioning and "overbought" US Treasuries, policy easing by central banks would trigger a strong rally in stocks.

Hence, "buy in first week of September," they said.

Looking out to the next decade meanwhile, they believed the investment backdrop would be "inflationary", accompanied by "fiscal excess" and a drive for greater equality that would benefit gold, value stocks and global small capitalisation stock, although the upside for asset prices would be "small".

On a negative note, they pointed out the recent underperformance of high yield debt versus investment grade, which they said was always a negative for stocks.

Several potentially negative risk events lay ahead over the next few weeks, they said, including the 19 August decision by the US government on whether or not to grant waivers for companies to trade with Huawei and a no-confidence vote in Italy on 20 August, followed by the Federal Reserve's central banking symposium at Jackson Hole on 23 August, the 24-25 August G7 summit and the next tranche of US tariffs on $130.0bn-worth of Chinese exports on 1 September.

On the recent inversion in the US Treasury yield curve, they said it was a "cry for help" in response to the ongoing recession in global manufacturing.

"Key now is bold policy to steepen yield curve (e.g. Fed cuts 50bps, PBoC cuts 100bps, Trump announces trade war truce)," they said.

Yield curve inversions have unintended consequences...volatility, and the risk of systemic accidents & deleveraging across asset classes rises," BofA-ML added.

Nonetheless, while the inversion had "worryingly" coincided with wider credit spreads, it had not come alongside a weaker jobs market, which would have sent an "unambiguous" recession signal.

They also highlighted the 5.0% increase seen in jobless claims in key US manufacturing states, on average, since Washington imposed tariffs on China back in September 2018 "which if continued raises risk of political change in the US in 2020 to less market-friendly administration".

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