* Not justified by fundamentals
We do not think the current market sell-off is justified by fundamentals. We think the recent weakness in European data is temporary and that the growth trajectory in the US remains intact. We note that global leading indicators have not declined significantly and are consistent with our growth forecasts.
* Positioning – technical
US retail sales has never before produced a 30bp swing in Treasury yields, as happened Wednesday. That's a pretty good indication that market technicals (e.g. hedging) are the dominant driver of the big moves. With the bond rally and the equity sell-off we would now need a 29% downward revision of US EPS estimates to take the equity risk premium back in line with its long-term average (40% in Europe). This, too, seems excessive.
* The key risk: self-fulfilling market move
The market move is not consistent with fundamentals. But a market move could impact fundamentals. A key space to watch is credit. We have written regularly about the fact that pricing in credit is rich, hence the potential for a correction. We have also written abundantly about the fact that illiquidity in the market is a key risk. A crash in credit (not our central case scenario) would be bad for growth. Watch credit--that remains the weakest link.