BofA - ML cuts miners, sees consolidation for banks and insurers

The move higher in equity markets was to continue but first investors would pause for breath following recent sharp moves, strategists at Bank of America-Merrill Lynch said.

“We think markets may well pause for breath too, particularly given the move in bond markets, but ultimately, we think the rotation and markets will both be supported by a synchronised uptick in growth indicators. We also see the rotation as a sustained trend, but think it has just gone far enough for now,” the investment bank’s strategists said in a research note published and sent to clients on 11 November.

BofA-Merill based the above view on its composite technical indicator models, saying that the last time such noteworthy readings were reached was at the trough of the post-Brexit shakeout.

Bond markets had seen the largest moves, in anticipation of a strong push for fiscal spending on the part of Republicans, they said.

That was true, above all, of US Treasuries, with the yield on the benchmark 10-year note selling off by 30 basis points over the span of three days, something not seen since 2011.

Among equities, the strategists downgraded their view on miners to ‘neutral’ and closed their tactical ‘underweight’ on technology. They also trimmed their ‘underweight’ in food and beverage stocks.

Banks and insurance were also ‘overbought’ from a technical standpoint, the investment bank said, adding that: “Again, such levels have been seen this year and preceded a period of consolidation rather than a sell-off.”

Defensives and long-duration bond proxies had suffered the most, with consumer staples and utilities in particular providing extreme oversold readings.