* The Year of the Blink
Both the Fed and the PBoC have "blinked” this year, allowing asset returns to remain buoyed by max liquidity, default concerns in Greece/China/energy to be unrealized and "carry trades" to reignite. Our long dollar, long stocks>bonds asset allocation has worked, but long volatility has thus far disappointed.
* Profit Recession
Max liquidity/minimal rates has permitted corporate equities and bonds to ignore the global profit recession (Chart 3 - global EPS -10% since July). We believe that changes if inflation unexpectedly picks up in U.S. or Germany. We are skeptical, not least due to “creative disruption/deflation” of the tech revolution. But investors appear so underexposed to inflation assets...we recommend adding some gold, vol, and cash.
* BofAML China trades
Tactically long A-shares (preference for laggard staples, resources, utilities); sell Ashares into strength on 3-6 month view; Pay 5-year US swap rates versus 5-yearoffshore China swap rates; long US$ call spreads versus CNY puts; “rent” underowned EM / materials / commodities in Q2.
* The Year of the Blink
Investors appear bullish again as the threat of "rates shock" fades. But extreme levels of monetary stimulus and rates threaten periodic bouts of volatility in 2015. Should an EPS recession continue, default contagion occur and/or, investor disobedience emerge (central banks tell the markets to do one thing and they do opposite), volatility is likely to spike, in our view.