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With everyone leaning in one direction, markets have a way of presenting the unexpected.
These shifts, known as painful trades, which have left a large group of investors sitting still, were the focus of the latest streaming offering memo from BofA Securities.
Strategist Michael Hartnett presents the current scenario.
On the one hand, no one expects a recession, and everyone expects two to three interest rate cuts over the next six to 12 months. With downside risks peaking in the first half, risk assets responded well to the risks of a Fed hike, Treasury yields above 5%, and a yen collapse.
On the other hand, the weakness of US employment is becoming increasingly evident at a time of very low US saving rate and the end of surplus saving. Jobless claims rise as credit conditions for small businesses weaken and growth in white-collar wages has remained flat over the past three months while the unemployment rate is rising, none of which is consistent with collapsing credit spreads. In addition, Bank of America's global EPS model is rolling, and catalysts for a moderate scenario such as US employment, US consumer and global PMIs “look bad.”
Best pain trade for bears: Hedging against higher downside potential by continuing to buy 30-year Treasuries (US30) and consumer staples (XLP), both of which are “unpopular.”
Best pain trading for bulls: Fed management willing to lower interest rates, betting on “the emerging rise in 'leverage-averse' operations such as China (FXI) (MCHI), UK (EWU), utilities (XLU) and regional banks (KRE) extends to… “Duration”, such as biotechnology (XBI) (BBH) and solar energy (TAN).
