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Macroeconomic & Geopolitical

Bearish Positioning is Met By Dovish Central Banks

24 June 2019 - 4 min read

The three things you need to know this week: Extreme bearishness amid increased pessimism, an impatient ECB and a boldly dovish pivot from the Federal Reserve.

Overview

BAML Global Fund Manager Survey: June’s survey was the most bearish since the global Financial Crisis, with pessimism led by worries over trade, recession, ineffective monetary policy and low strike prices for policy puts. Cash holdings saw the biggest jump since the August 2011 U.S. debt ceiling crisis, and equity allocations experienced the second-biggest drop on record. The relative allocation of equities over bonds fell to its lowest level since May 2009, with notable defensive rotations. The macro outlook was bearish with global growth prospects dropping, the second-biggest decline in EPS expectations and a record number of investors indicating the economy is late cycle.

ECB Stimulus: In a speech at the annual ECB forum in Portugal, ECB President Mario Draghi said additional stimulus will be needed if the growth and inflation outlook doesn't improve. He noted further rate cuts are part of its toolkit, and renewed asset purchases are an option even if it means raising the self-imposed limits on how much it can buy. Market reaction to the news saw the euro decline, German and French 10-year yields hit a record low and money markets price in a 10 bps interest rate cut by September.

Fed Dot Plot: The Summary of Economic Projections released at the June FOMC meeting showed the median Fed Funds rate for 2019 was unchanged from the March release at 2.375%, although the range of outcomes widened to 1.875-2.625% from 2.375-2.875%. The median 2020 dot plot fell to 2.125% in June from 2.625% in March. The estimate for 2019 GDP growth was unchanged at 2.1% and revised up by .1% to 2% in 2020. The unemployment rate forecasts for 2019-21 were all lowered by .1% to 3.6% this year, 3.7% next year and 3.8% in 2021. Inflation estimates were lowered, with PCE expected to rise 1.5% in 2019, down from 1.8% in March and 2020 PCE revised down to 1.9% from 2% in March.

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