Kolanovic says there are more than 3 reasons but the big 3 are:
- the limbo for debt-ceiling negotiations
- elevated risk of recession
- hawkish Federal Reserve
Kolanovic recommends:
- trim allocation to stocks and corporate bonds
- up stake in cash by 2%
- rotate out of energy and into gold (citing haven demand and as a debt-ceiling hedge)
Remarks:
- “Hopes of a swift resolution to the US debt ceiling have somewhat bolstered market sentiment”
(this dissipated Tuesday, of course:
Oh … Greg seems to have mistaken **** for mud … or maybe he is just more polite than me 🙂 )
Back to JPM:
- Despite last week’s rebound, risk assets are failing to break out of this year’s ranges
- credit and commodities are trading at the lower end of this year’s ranges
- divergence remains between rates markets that expect the Fed to cut this year, equity markets that interpret those potential cuts as positive for risk, and the Fed’s more hawkish rhetoric
- this gap is likely to close at the expense of equities
- rate cuts will likely only transpire from a risk-off event, and if rates stay higher they should weigh on equity multiples and economic activity