Bank of America strategists warn that stock markets may face challenges in the first quarter of 2024 if bonds rally, indicating a slowdown in economic growth.
Analysts, who have maintained a bearish stance on risk assets for some time now, point out that lower yields were a key driver of equity gains in the current quarter.
However, if yields drop further toward 3%, it could signify a "hard landing" for the economy. In this case, the traditional narrative of "lower yields = higher stocks" might switch to "lower yields = lower stocks.”
“Stocks up, job openings down; autumn "higher yields = harder landing" narrative now winter "softer landing = higher stocks” (see JOLTS & Fed funds); Nov payroll 125-175k maintains winter narrative, but <100k Nov payroll signals “hard” coming, as predicted by ISM,” analysts said in a note.
The strategists also discussed a jump in the Japanese yen, which has experienced a significant 6% increase over the past four weeks, signaling market expectations of the end of Japan's ultra-easy Yield Curve Control policy.
Historically, substantial 10-20% jumps in the Japanese yen have coincided with global volatility events, analysts warned.
The termination of Japan's YCC policy is seen as raising the "floor" for global yields. Moreover, a higher yen poses a significant test for the bull market in Japanese stocks, as a true bull market is characterized by the Nikkei rising alongside a stronger yen.
As far as key flows in a week to Wednesday, December 06, are concerned, as much as $93.2 billion moved into cash, marking the largest inflow since March 2023.
Equities received a more modest $6.2 billion, while bonds saw an inflow of $51 million. On the other hand, gold experienced a small outflow of $0.4 billion.
The significant movement towards cash suggests a preference for liquidity and a cautious approach among investors, potentially reflecting uncertainties or concerns in the market.