BAML WARNS: The markets will soon face 'the ultimate risk'

The primary driver of market performance over the past seven years hasn’t been company performance.

It has been central bank action, argue the analysts at Bank of America Merrill Lynch.

From the US to Japan and China to Switzerland, central banks have moved interest rates and foreign exchange rates as they have overwhelmed the markets with loos monetary policy.

Now, their influence will begin to decline. The US looks ready to start down the long road to reducing its presence in the market. And that is likely to lead to a bunch of wild market moves.

Bank of America Merrill Lynch strategist Michael Hartnett said in a note on Wednesday: “We believe the inexorable rise in volatility as QE programs wane leads to the ultimate risk.”

Here is the relevant passage from the note:

In our view, all investment strategies have been tied in recent years to the power of central banks. There are few bond vigilantes willing to punish profligate governments, fewer currency speculators willing to defy central bank intervention, and investors have become adept at front-running policy-makers and/or expecting central banks will “blink” at signs of market volatility. We believe a loss of central bank potency is an unambiguous risk-off.

Investors are going to have to get used to a wider array of factors moving the market, and a lot more volatility.

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