Investors hold firm to their Eurozone equities despite growing worries about the outcome of the French presidential election, according to the latest poll on investor positioning published by Bank of America Merrill Lynch.
Investors consider a « Le Pen Win » might produce a 5-10% market correction, but the real risk would be a Europe disintegration in the case of « Frexit », which would have deeper and far more negative implications.
US 10 year yield is around 2.5% which is quite low. But if you take inflation into account, the situation is far worse. But real rates should be higher, based on the current fundamentals of the economy. This means that central banks should have ended QE some time ago already, but they can’t because they are prisoners of financial markets. They are just stuck in a mess they helped creating in the first place, because they never got the guts to stop banks around the world, and especially in the US, from doing stupid things.
Early 2007. HSBC had to concede it had deep financial troubles related to the US real estate market. The word « subprime » was starting to spread. Key players in the US real estate market, such as New Century, were also getting destroyed by the same rising tide. It was the start of the most important financial crisis in history since 1929.
« As equities rallied and bonds sold off, our measure of risk appetite reached a new post-crisis high, but it has started to retreat more recently. Near-term, we think growth optimism will persist and keep risk appetite strong. We are long US equity near-term as it should be a direct beneficiary of growth optimism, but expect optimism to moderate eventually. Later in 2017 we are looking to rotate from S&P 500 to EM (specifically EM-ex-China) where risk appetite has lagged and we expect the growth picture to be more supportive. We also like Europe and Japan on a 12-month horizon in our asset allocation. Both of these lagged global equities in 2016, but should continue to be beneficiaries of reflation and have supportive monetary policy backdrops. »
On a 12 month horizon, GS is overweight Equities, with a bias towards Europe and Japan, but underweight US equities and Neutral on Asia ex-Japan.
The bank underweights Government bonds and is Neutral on credit (yet with a preference for US High Yield and Euro High Yield).