The fiscal cliff has completely dominated the headlines since the presidential election was decided last Tuesday.
BofA Merrill Lynch’s latest client survey of fixed-income investors confirms that the fiscal cliff is the biggest thing on the market’s mind right now:
After having navigated the uncertainty minefield earlier in the year with a multitude of large risks, from China to Europe and the US, US credit investors are now more singularly focused on one remaining major concern – the US fiscal cliff, according to our most recent survey of credit investors.
As fiscal cliff concerns have risen between September and November, many others have waned – especially that regarding oil prices.
In fact, less than half of those who called an oil price shock emanating from a conflict in the Middle East a big concern in September did so in November.
BofA Merrill Lynch credit strategist Hans Mikkelsen and his team say that’s the biggest thing that investors are underappreciating:
The one risk that appears to us under appreciated by investors is the risk of higher oil prices – mentioned by only 6% of investors as a major concern – especially as there are significant risks of an escalation of the geopolitical situation in the Middle East.
On the other hand, BofA equity strategists peg the risk of an oil shock owing to a potential military conflict between Iran and Israel at below 10 per cent. Here is what they had to say in a recent report on the subject:
Although tighter sanctions and the blockade of crude exports from Iran have reduced the country’s oil exports, Iran is still OPEC’s fourth largest oil producer, exporting about 1 million barrels a day. According to Commodity Strategist Francisco Blanch, a full blown Iranian oil supply disruption could push Brent oil prices up by $20-40/bbl and have twice the impact of Libya on global supplies and prices.
Indeed, the potential fallout from an Iranian strike could be much, much greater given that the oil market is already tight and that 20% of the world’s oil is transported through the Strait of Hormuz. A sustained rise in oil prices above $150/bbl would likely result in a recession and necessitate a significantly more defensive asset allocation.
That scenario wouldn’t be pretty, but given that BofA’s equities team labels this a “tail risk” with less than a 10 per cent chance of happening, maybe the bank’s credit clients aren’t so far off the mark.
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