Bank of America strategist Michael Hartnett continues to favour commodities and gold, saying policy measures aimed at containing bond yields are having an effect on financial markets.
“Policy panic [is] working,” Hartnett and his team wrote. They pointed to gains in the Japanese yen while discussing efforts to defend market levels including $4-a-gallon gasoline, 160 dollar-yen and 5% Treasury yields.
Hartnett said central banks are leaning towards rate increases as policymakers seek to maintain credibility and limit upward pressure on bond yields. He said investors should remain long commodities and assets he categorises as debasement hedges, including gold.
His assessment also considered longer-term performance across asset classes. Ten-year rolling returns stand at approximately 15% for U.S. equities and 11% for commodities, while Treasuries have returned negative 2%, according to Hartnett.
The Treasury figure represents the weakest 10-year performance in a century, he said. Hartnett compared the current long-term return environment with previous periods including 1939, 1974 and 2009 for equities and 1933 and 2018 for commodities.
U.S. midterms add another factor to market outlook
Hartnett said investors have largely looked through risks surrounding the upcoming U.S. midterm elections, while assessing several potential outcomes.
He considers a Democratic sweep unlikely because of the Senate electoral map, while noting the administration’s increased use of executive action rather than Congress.
At the same time, Hartnett said Trump’s approval rating has declined to between 35% and 40%, compared with a historical average of 53% two months before midterm elections. Prediction markets now indicate a 50% probability of a Democratic sweep, according to the report.
Hartnett said such an outcome could produce a risk-off response, including an equity decline exceeding 10% alongside lower dollar and bond yields. Conversely, he said an unexpected Republican sweep could result in additional risk-taking.
He characterised a Republican Senate combined with a Democratic House as a modest risk-on outcome, describing the scenario as “gridlock = goldilocks.”
Weekly flows favour cash and fixed income
Cash funds recorded $30 billion of inflows during the week through Sept. 2, the largest amount among the asset classes cited in the report. Bonds followed with $18.3 billion, while gold attracted $3.2 billion and equities received $2.8 billion.
The equity inflow was the smallest in nine weeks. Cryptocurrency funds received $500 million, bringing cumulative inflows over five weeks to $5.5 billion, the highest since October.
Investment-grade bonds attracted $9.2 billion for a 22nd consecutive week of inflows. Treasury funds received $6.2 billion for their 10th consecutive positive week, while high-yield bonds recorded $1.5 billion of inflows. Bank loans experienced $600 million of outflows, their first weekly withdrawal in 13 weeks.
Japanese equities received $1.4 billion, marking a second consecutive week of inflows, while European equities attracted $800 million.
U.S. equities recorded $5.9 billion of outflows for a second week, and emerging-market equities saw $5.4 billion leave. Chinese equities registered $5.3 billion of outflows for a fifth consecutive week.
Technology funds posted $1.5 billion of withdrawals, their largest outflow since June, while financial funds recorded $900 million of outflows for a fifth consecutive week.
Leave a Reply