By Jules Rimmer
The last three months witnessed the biggest spike on record for risk appetite, according to Bank of America’s global fund manager survey for July released Tuesday.
Cash levels dropped to 3.9% from 4.2%, triggering a sell signal on BofA’s proprietary trading model. This is the second sell signal prompted in the last week by BofA trading rules, after inflows to global equity and high-yield bonds exceeded 1% of assets under management over a four-week period.
The research team, led by global strategist Michael Hartnett, reports that sentiment is “toppy” but with positioning not yet extreme and volatility in bonds still low, investors were more likely to hedge and rotate through the summer than sell stocks or even short them.
What may be dissuading them from cashing out at this juncture is the specter of rate cuts on the horizon. Almost half of those polled predict two 25 basis-point cuts from the Fed before year-end, even if very few (only 11%) expect one of those this month when the Federal Open Market Committee decision comes on July 30.
The swing in sentiment to the most bullish since February is perhaps best exemplified by the survey’s findings on the probability of a recession where 59% of respondents now think it is unlikely.
Unsurprisingly, the trade war features as the most prominent tail risk for asset markets. Expectations for the average tariff rate eventually imposed by the U.S. on the rest of the world crept up one percentage point to 14%. The second-most frequently aired concern is the possibility that the Fed makes no changes in monetary policy and disappoints the bond market.
Hartnett last week provided feedback from client meetings conducted this summer where very few expressed concerns about valuations or the economy and none asked about China. However, what caused them to fret at night were bonds BX:TMUBMUSD30Y and deficits and the prospect of a disorderly sell-off at the long end of the yield curve.
The most crowded of trades, for the first time since the survey began, is the consensus on shorting the dollar DXY , which, at 34%, replaces long gold as the most pronounced investor bias. The flipside of this stance is the net overweight of 20% to the euro (EURUSD) – the biggest for two decades.
No wonder then, the most striking contrarian trade this poll suggests would be shorting the euro, the BofA note says.One final note: 26% of respondents think Treasury Secretary Scott Bessent will be the next chair of the Fed with Kevin Warsh next most likely at 17%.
-Jules Rimmer
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