BofA: "Massive Market Inflection Point Coming This Summer: Will Lead To Fall Crash"

One week after BofA's Michael Hartnett became the latest strategist to admit the truth, when in his Flow Show report from last week he said that "central banks have exacerbated inequality via Wall St inflation & Main St deflation" and now that they are hoping to quickly and painlessly undo their error, there are "two ways to cure can make the poor richer...or you can make the rich poorer..." concluding that the "Fed/ECB are now tightening to make Wall St poorer" because it is "no longer politically acceptable to stoke Wall St bubble", he has followed up with a note in which he looks at the vast change in the market landscape over the past year.

As he says, one year ago, July 11th, 2016, 30-year Treasury yield hit all-time low (2.14%), and Swiss government could have issued a 50-year bond at a negative yield (Chart 2 shows 10- year Swiss yield back to 1900).

One year later, 10-year bond yields up from 1.43% to 2.37% in the US, from -0.27% to 0.10% in Japan, and from -0.17% to 0.56% in Germany. Over the same period, global equity full float market cap rose $10.0tn to $76.3tn.

Then in a follow up from his recent report predicting when the Fed may be preparing to finally open the trapdoor beneath the market, the BofA analyst writes that over the next 6 months, higher interest rates likely be "much more negative for stocks & credit given new central bank policies"; tightening by the Fed, rhetorical tightening by ECB has already succeeded in raising bond yields, volatility, reducing tech stocks, he says as he urges clients to slowly step away from the exits.

And, when looking at near-term catalysts, he views the summer of 2017 as a "massive inflection point in central bank liquidity trade…will likely lead to “Humpty-Dumpty” big fall in market in autumn, in our view." The outcome of this global coordinated tightening, as he has shown below, will be a "financial event"

In addition to central bank liquidity, two other factors that Hartnett believes will force a market inflection point are corporate bonds & profits which are rolling over: "key for timing the big top in risk assets in autumn: credit markets remain strong, but note US high yield has lagged high grade since March (and note disconnect with European credit markets – Chart 4)."

Finally, he adds that while corporate profit growth has accelerated (Chart 5), the disconnect with payroll growth is notable; further weak payroll growth would hint at profit top and policy mistake.

In summary:

In past 12 months, 10-year Treasury yield up almost 100bps, global equity market cap up $10tn.


Next 6 months higher interest rates likely much more negative for stocks & credit given new central bank policies; flows show “lust for growth” under pressure in stocks, but “lust for yield” unbroken in bonds. Corporate bonds & profits key for timing the big top in risk assets in autumn


Yen Cross Fri, 07/07/2017 - 12:21 Permalink

  How does a drop in equity markets help Joe Plumber? The money[profits] just gets erased from the books, and the value of everything drops, but Joe has to pay MOAR to live because of higher rates.  Joe doesn't have any savings in the first place, in order to invest in higher yields, because his savings were strip-mined by the fucking fed. through nine years of ZIRP!

Gordon_Gekko Fri, 07/07/2017 - 12:26 Permalink

BofA just trying to fool some bears to place bets so they can be slaughtered by the central banks. This FAKE stock "market" will NEVER go down. It's just a propaganda tool at this point.

djrichard Fri, 07/07/2017 - 12:34 Permalink

yield on 13 week treasury is increasing at a pretty steady clip: 20 basis points over the last 3 months.  If it keeps it up, at that rate, that's 80 basis points per year.   So give it between 1 and 2 years and it eclipses the 10Y yield, inverting the yield curve.  The punch bowl is officially gone then.Edit: in the mean time, keep on dancing.

chomu Fri, 07/07/2017 - 12:57 Permalink

Wake me up when the yield curve goes full invert...thats' when things will get interesting. Until then BTFD and sell volatility

Madcow Fri, 07/07/2017 - 13:06 Permalink

Gov-Co Int’s Inc. ™ was planning to collapse the global economy on August 1. But then they realized that too many staffers would be on vacation in August and might not be able to get home safely.  Then they considered September, but too many were planning to take their kids to school and visit colleges that month.  November and December were taken off the table because of potential interference with holiday travel. At this point, they’ve settled on October, but still arguing over the exact date. There are a couple of birthdays of influential insiders to consider - along with a number of dates that could potentially inflame tensions and cause the public to blame one interest group or another. Vegans object to October 2nd - coming just one day after "World Vegetarian Day." Europhiles are against October 6th, which is "German-American Day."  The 10th is out due to "World Mental Health Day" (arguably not the best day to implode Western civilization.) Feminists are opposed to the 11th, which is "International day of the girl.”  Jews reject the 11th and 12th (“Shemini Atzeret and Simchat Torah), while agribusiness leaders are against 16th("World Food Day"). Catholics are opposed to the 18th ("St. Luke’s day") and Hindus are opposed to the 19th ("Diwall Hindu Festival.”) The 24th is obviously out because of “United Nations Day.”Then there's "National cat day," “National chocolate day,” “National nut day,” “International coffee day,” and “Halloween” on the 31st to consider. And so, it’s looking like it’s they’re going to collapse the global economy either on October 3rd or October 26th. Plan accordingly. You have been warned.     

Batman11 Batman11 Fri, 07/07/2017 - 14:20 Permalink

Central Banks created a “wealth effect”.The wealth effect can only be maintained by pumping lots of liquidity into the markets.The Central Bankers lifted the markets up expecting the real economy to rise to meet the valuations.The real economy drives the markets; the markets don't drive the real economy.Silly old Central Bankers.Are they silly or do they know what they are doing?

In reply to by Batman11