Bank of America Securities: 129 rate cuts by global central banks ignite market, the "celebration" of risk assets will continue but warns of excessive speculation

According to the Zhitong Finance APP, Michael Hartnett, a strategist at Bank of America Securities, stated that global monetary easing policies are driving a wave of risk appetite that will continue until the end of 2025, with investors still chasing returns in the gold, stock, and credit markets.

He attributed this optimism to the gradual fading of the "tail risks" that had overshadowed the market a year ago, such as disorderly bond sell-offs, the resumption of trade wars, or further tightening of policies by the Federal Reserve. In contrast, global central banks have implemented 129 rate cuts by 2025, U.S. Treasury volatility has stabilized, and the stock market has reached historic highs.

"The failure of 'tail risks' to materialize and the 129 global rate cuts explain why demand for gold, stocks, and credit is so strong," Hartnett wrote in his latest weekly report on October 31. He noted that investors' confidence in "Fed put options, Trump put options, and Gen Z put options" indicates that the market believes policymakers and young retail investors will continue to support the market.

Risk assets are broadly strengthening

According to Bank of America's asset performance data, gold has surged 53% this year, stocks are up 21%, and Bitcoin has risen nearly 15%. The credit market has also performed strongly, with investment-grade bonds up about 10% and high-yield bonds up 9%. In contrast, the dollar has fallen 8%, and oil prices have dropped 16% this year.

The strategist pointed out that the "biggest bearish risks" facing 2025 have not materialized. U.S. Treasury volatility has fallen to its lowest level since 2021, and a trade truce has been reached between China and the U.S. Despite the stock market hovering at record highs and credit spreads hitting multi-year lows, the Federal Reserve has begun the rate-cutting process.

Positioning and capital flows

Recent capital flows show $36.5 billion flowing into cash, $17.2 billion into stocks, and $17 billion into bonds, while gold has seen an outflow of $7.5 billion after a significant inflow at the beginning of the year. The Japanese stock market has experienced its largest capital inflow since April, while materials stocks have faced record outflows.

The Bank of America bull-bear indicator has risen slightly from 6.2 to 6.3, reflecting a general strengthening of global stock markets and an improvement in the credit environment, although inflows into high-yield bonds and emerging markets have slowed.

Outlook: Risk appetite will continue until inflation rebounds

Hartnett believes that asset allocators are likely to maintain their risk appetite until inflation clearly accelerates again. Bank of America's baseline forecast assumes there will be 81 more rate cuts globally by 2026, and this prediction may be adjusted if inflation trends approach 4%.

"For investors hoping to hedge against unexpected tightening of financial conditions in the fourth quarter, the most effective painful trade is to go long on the dollar," Hartnett pointed out that risk assets have shown "signs of bubbles," and the market is overly confident in AI leading the stock market trends.

The strategist continues to recommend gold and Chinese stocks as tools to hedge against excessive speculation, while warning that a sharp reversal in key market indicators (such as U.S. bank stocks or junk bonds weakening) could signal the end of the current rally. Hartnett stated, "Investors are positioning themselves in advance for prosperity and bubbles," firmly believing that every market downturn will be supported by policy measures