The market is fickle and eccentric, and that emotional combination has led to extreme vulnerability to interpretations and reinterpretations of U.S. economic growth and toxic tweets from Trump about a potential trade war with China.
On any given day, the markets can swing widely on a whisper, or even less. On Friday, trade war fears hit a new high, and then over the weekend, they eased again. The previous weekend saw that same pattern.
The big investments banks aren’t necessarily of a single mind on the market, some advising clients to buy on the dip, and others suggesting another big correction is coming, while still others say we’re looking at the preliminaries for a major crash. Most say all are equally strong possibilities, which means investors have no sound advice with which to make big decisions.
This is the view from the top from three big investment banks heading into this week:
#1 Citibank: Buy on the dip but mind the correction
Eyeing higher global economic growth and more capital spending by companies thanks to U.S. tax cuts, Citi advises us to buy on the dips but beware bigger market corrections as market volatility increases and the Fed considers more interest rate hikes.
Citi expects bigger sell-offs head that will open up new opportunities for bargain hunters, recommending “buying equities on the bigger dips”.
From Citi’s perspective, we haven’t reached a bear market yet and the positives are still outweighing the negatives, with the bank’s latest round of forecasts implying a “rise in global equity markets of about 8 percent to the end of the year, led by Europe with about 13 percent”.
"Thus, we still see upside for equity markets, but we caution that higher volatility and bigger corrections are likely," Citi said. "The conclusion is to judiciously buy on dips.”
#2 UBS: Peak fear is here
Swiss UBS says the markets may have already hit peak fear in terms of a potential trade war between the U.S. and China, and expect less panicked responses to tariff talk going forward.
Looking just at the weekend’s developments, the UBS take seems rational enough—but the market is definitely not rational. Related: Why Crypto Millionaires Are Trading Over Skype
When Trump said on Friday that he wanted to hit China with another $100 billion in tariffs, the market tanked. Then over the weekend investors were already calming down as mixed messages came out of Washington about the potential for a trade war.
Whenever the market is reminded that these threats are still only proposals and not policy, fears subside—until the next Tweet or the next explosive tariff headline.
“The threat of ‘trade wars’ is another concern driving equities. There is little clarity at the moment, but media coverage suggests we may have hit ‘peak fear’,” say UBS analysts.
The problem, says UBS, is that "Equity markets tend to struggle to price in the small probability of a very negative event occurring”.
#3 MGMB: Market bubble is epic and ready to burst
Thailand-based MBMG Group sees the market in the midst of a bubble that it calls “epic” and ready to burst at any moment because of a sharp increase in stock prices that was largely fake—and the result of a massive market intervention that boosted lending and encouraged growth.
It’s not real, though, says MBMG’s Paul Gambles.
Gambles sees a repeat of 2007 events leading up to the global financial crisis.
"We had a policy response to the global financial crisis [and] at that point stocks were cheap and they had an enormous tailwind behind them in terms of fiscal support," Gambles told CNBC.
"This is quite a dangerous situation and it is creating a bubble, and that bubble has just got bigger and bigger and bigger … There isn't any doubt now [that] in valuation terms we're in epic bubble proportions, probably the biggest bubble of all time."
MBMG now thinks that “there are conditions out there that are prime for that bubble to actually be pricked”.
But Gambles cautions that at the end of the day, no one’s got a clue because there are so many possible outcomes and the variables are more numerous than they’ve ever been.
"We could have a good stock market year, we could have a 20, 30, 40 percent plus correction," he said.
By Tom Kool for Safehaven.com
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