BofA: "This Is The Key Risk-Off Signal" Ahead Of This Autumn's "Big Fall"

BofA: "This Is The Key Risk-Off Signal" Ahead Of This Autumn's "Big Fall"
// Zero Hedge

One month ago, BofA's chief investment strategist Michael Hartnett predicted that the "most dangerous moment for markets will come in 3 or 4 months." So now that we are between 25% and 33% closer to said "moment", what does Hartnett think now? Perhaps not surprisingly, in a note released on Friday, the Bank of America analyst writes that with a surge in risk off flows, a "more imminent Aug/Sept risk-off trade" is looking plausible "if poor politics shows up in consumer confidence, US dollar rises despite lower UST yields and further drop in US presidential approval ratings" compounded by high yield credit spreads gapping toward 500bps and ending tech leadership reversal.

In short, the "humpty-dumpty" trade that Hartnett has been describing ever since he coined the "Icarus rally" term earlier in the year, is "staring to wobble" despite - as he calculates - the $1.69 trillion in central bank purchases YTD. Some of the main factors he lists why BofA, like JPM previously, is starting to tiptoe to the exits, are the following:

  • Risk-off flows: There were $1.3bn weekly outflow from equities, $3.5bn into bonds, $0.5bn into gold
  • North Korea: outflows clustered in "fire & fury" Thurs/Fri/Mon period; but North Korea redemptions ($7.4bn equity outflow) not particularly large (larger 3-day outflow in April)
  • High Yield outflows: biggest HY bond fund outflows in almost 6 months ($2.3bn); HY spreads jumped 36bps last week from 364bps to 400bps
  • Emerging Market outflows: 1st EM equity and debt outflows in almost 6 months ($1.7bn); coincides with bounce in oversold USD (EM reverse-correlated with DXY)

  • BofAML Bull & Bear indicator drops: HY & EM outflows + more defensive hedge fund positioning via futures + Aug FMS cash flat at 4.9% = BB indicator drops from 7.7 to 7.2; no "sell signal" triggered but ...
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