Bank of America Merrill Lynch (BAML) analysts just flagged up five factors that could cause a “cleansing drop in asset prices.”
They have even given the possible catalysts a catchy acronym: “C.R.A.S.H.”
Each is an assumption of a consensus in the market at the moment, which if overturned could spark a slump.
Here are the “C.R.A.S.H” indicators to watch, with some snippets of text from the note itself:
- Consumers: US consumption data has been unexpectedly weak in recent months. “Few are positioned for a contagious sell-off in US dollar, bonds & stocks if US GDP growth were to stumble once again in Q2 & Q3.”
- Rates: If inflation picks back up more quickly than expected, the low and stable interest rates most investors are expecting might not be a given, and a surge would be destabilising.
- A-shares: China’s surging stocks provide BAML some reasons to worry. “Investors are not positioned for full-blown policy failure in China. Chinese growth expectations may be weak, but the A-share market hardly portends a collapse in Chinese activity.”
- Speculation: “There is a risk that investors, in particular systematic macro funds, have crowded and levered positions that do not assume a rise in cash rates.”
- High yield Markets scrambling to find investments with decent yields, given low interest rates around the world, “remains the biggest Achilles’ Heel for positioning,” according to BAML.
On the last point, they have illustrated the surge into high-yield investments, compared to safer and lower-yielding assets like inflation-protected US bonds (TIPS):
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