Bank of America’s Top 9 Reasons to Worry

Australia’s ASX shrugged off the China stimulus news yesterday as low interest rates reign supreme and last night we saw $2.3b of gold contracts dumped onto the market in 10 minutes, wiping USD11 off the USD1286 spot process in the process (because that is how one sells when one wants to maximise profit huh…?).  These, dear reader, are not normal times.  Topically Bank of America Merrill Lynch Global Research yesterday joined the chorus of majors posting warnings of an imminent crash.  BofAML list their top 9 reasons:

1)   Stress in the High Yield bond market – as we reported in Friday’s weekly wrap, high yield ‘junk’ bond yield spreads (or Distress Ratio) have spiked again as they did in February.

2)   Corporate buybacks peaking – not since the previous peak in 2007 have we seen the amount of companies (65% of the S&P500!) buying back their own shares (using debt).

3)   Jump in expected negative profits - not since the GFC have we seen so many companies with 12 month projected negative EPS (earning per share).  Remember too, that buying back your own shares improves your EPS growth….

4)   Risks around Fed tightening – In the context of 3)… previous times of rate hiking during profit recessions have not ended well… Bets are still running on a rate hike as soon as June.

5)   Weak IPO activity – Year to date IPOs (Initial Public Offerings – new public listings of companies) are at the lowest level since the GFC, and in dollar terms the lowest since 2003 after the dot.com crash.

6)   Tightening bank lending – Banks have tightened credit standards for the last 3 consecutive quarters.  That hasn’t occurred since the onset of the GFC.  Put that in the context of all the freshly printed money in the system too.

7)   Further weakness in oil – BofAML are predicting another plunge in oil in Q3 this year, taking equities down with it.

8)   US Election Uncertainty – to be sure the Trump factor is at play, but it goes well beyond that.  The US Policy Uncertainty Index, one closely aligned with the market’s VIX (volatility index) hasn’t been this high since the 2013 Government Shutdown.  BofAML are predicting it to increase in the lead up.

9)   BREXIT risks – 23 June is getting close for the vote on the UK leaving the EU and polling is very close.  Should the vote come in favour they predict a 15% fall in markets on that alone. (Outside of BofAML there are far worse predictions in terms of contagion from EU).