JPMorgan favors commodities over bonds and warns the stock market rally is poised to fizzle

oil tanker

Picture by ANGELOS TZORTZINIS/AFP by way of Getty Pictures

  • JPMorgan is obese commodities exterior of gold, given weak positions and geopolitical danger.

  • Issues with US Treasury provide haven’t been resolved by current developments, it stated.

  • In the meantime, traders are too optimistic equities can run larger, amid a slew of headwinds.

JPMorgan really helpful commodities over authorities bonds, and reiterated a cautionary stance on the continuing inventory market rally.

In a Monday word, chief world markets strategist Marko Kolanovic stated the financial institution remains to be positioned for protection, regardless of current investor optimism.

“This month, we take revenue on our lengthy period publicity in authorities bonds given their robust rally, rising provide, dovish Fed pricing and elevated investor positioning,” he wrote. “We use the lower in bond allocation to fund a rise in our commodity allocation given nonetheless excessive geopolitical danger, and the numerous sell-off and weaker positioning in vitality, and we incrementally shift our within-commodity allocation into vitality.”

Although he acknowledged that belongings reminiscent of oil have taken successful up to now month, with Brent crude sliding over 12% since late September, traders have turn into too underweight on commodities exterior of gold.

That is based mostly on a comparability of open curiosity of commodity futures ex gold, which signifies that allocation within the asset class has loads of room to run up.

In the meantime, oil’s lowered pricing additionally makes it a dependable geopolitical hedge, as Center Jap turmoil continues to stay elevated. On this case, JPMorgan’s desire for vitality belongings outweighs that of gold, which seems set for an overcorrection decrease.

In opposition to this, the financial institution has turn into underweight in bonds this month, on concern that long-duration yields should still be within the means of peaking out.

Whereas some reduction got here from the Treasury Division’s current resolution to decelerate bond issuance, in addition to the Federal Reserve’s newest rate of interest pause, the oversupply of Treasurys is barely a worsening drawback, Kolanovic wrote.

In the meantime, traders should not lean on equities, as present optimism within the inventory market is indifferent from a slew of mounting headwinds, Kolanovic stated.

“In equities, we retain a defensive stance and are unwilling to chase the previous two weeks’ rally. Our defensive stance hinges on our expectation {that a} recession will happen subsequent 12 months,” he wrote.

Particularly, higher-for-longer financial coverage and costly fairness values might come to problem the continuing rally, he wrote. Shoppers are additionally prone to pull again spending, given depleted financial savings and a tighter credit score surroundings.

“That is prone to drive demand destruction, and weakening pricing energy and margins for corporates within the coming quarters, and means that consensus expectations that search for 12% EPS development subsequent 12 months seem overly optimistic,” Kolanovic added.

Learn the unique article on Enterprise Insider

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