Too soon to position aggressively for interest rate cuts, BofA says
Strategists at BofA Securities highlighted the recent "big rotation" into technology issues, those of the biotechnology sector in particular.
However, they judged it to be too early to position aggressively for interest rate cuts - absent a "credit shock" in the second half of 2022.
They also judged that the 1973-74 roadmap was "working", even if at twice the speed, which argued for a big trading range over the next three months and then a "final move lower".
In their opinion, driving that "big rotation" was the 'summer narrative' of an economic recession in the back half of 2022 and interest rate cuts by the Federal Reserve in 2023.
Or as Michael Hartnett and Myung-Jee Jung put it in a research note sent to clients, 'tech lemons' turning into summer 'lemonade' as the inflation theme that favoured commodities broke down, giving way to a deflation theme benefitting technology.
Indeed, since mid-June biotech had returned 32% versus a 23% drop for energy.
Regarding the "biggest picture", they noted two events since their last weekly update: Germany had registered its first trade deficit since reunification in 1991 and European natural gas prices had soared 131% over the preceding four weeks on fears that Russia would fail to reopen the Nordstream 1 pipeline come 21 July.
And as for some of the "flows to know", over the last week US Treasuries has seen their biggest inflows in eight weeks, to the tune of $7.8bn, Technology a fourth week of inflows with $0.4bn - amid a rotation to "peak yield and growth" - and Emerging Market stocks their biggest outflows, of $2.0bn, in eight weeks.
Linked to the latter, they also highlighted how EM assets had gotten "trashed" with EM debt at its weakest versus US investment grade debt since the Great Financial Crisis.
On a related note, they highlighted how a 185 basis point interest rate hike out of the Bank of Hungary had failed to bolster the country's currency, the forint.