Red hot rally in stocks, risk assets has some way to run: BAML

By Marc Jones

LONDON (Reuters) – The powerful rally in global stocks and other markets is likely to persist until higher borrowing costs and a stronger dollar force investors to back off, Bank of America (NYSE:) Merrill-Lynch’s analysts said on Friday.

The U.S. investment bank’s weekly round-up of financial market flow tracking data showed $10.1 billion had exited U.S. stocks in the biggest move in more than nine months.

At a global level it was reduced to $4.5 billion by inflows elsewhere and came after $14.4 billion of worldwide buying the week before.

There was also $9.2 billion of inflows into bonds this week – the biggest amount in three months. The breakdown revealed money going into investment grade and emerging markets debt and the first inflows into riskier high-yield bonds in 10 weeks.

Invoking the figure from Greek mythology who flew with wings of wax too close to the sun, BAML’s analyst said: “(The) Icarus melt-up trade isn’t likely over and won’t be until rates (are) a lot higher and (there are) big redemptions in ‘yield’ plays.”

Mid-way through last year BAML was predicting a “Humpty Dumpty-style big fall” for stocks but seems to have shelved that call for now.

While the analysts stressed there was still a risk of markets overshooting, they said positioning appeared fine for now. A “Bull & Bear” sentiment gauge they calculate sits at 6.2, well below the 8 level when alarm bells start to ring.

BAML first-quarter targets are “bullish”, they added, due to expectations of 5 percent-plus U.S. real GDP growth in Q1 and Q2 and 20 percent growth in U.S. earnings per share.

Wall Street’s is seen reaching 2,860 points from its current 2,723 points, Nasdaq to 8,000 from just over 6,000 now and benchmark 10-year U.S. Treasury yields rising to 2.85 percent from 2.46 percent now.

To view a bull and bear graphic, click: http://reut.rs/2CviRLn

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