BofA-ML cautions risk appetite may be set to correct

Strategists at Bank of America-Merrill Lynch cautioned clients on Monday that financial markets might be set to "correct".

According to the investment bank, two of the three potential drivers of higher share prices - a trade deal between the US and China and a more 'dovish' Federal Reserve - were already priced-in.

The third driver was improved economic data out of China, but that was a story for the second quarter, BofA-ML said.

Indeed, the strategists said they had already 'closed' many of their long positions for emerging markets and recommended adding to currency hedges, including on the following crosses: Australian dollar/Japanese yen, Chinese yuan/Japanese yen, and US dollar/Mexican peso.

"Our quant signals suggest that risky FX look vulnerable to a resumption of weakness. JPY should shine again. Higher conviction views are short AUD/JPY and USD/JPY," they added.

Regarding specific currencies, BofA-ML pointed out how funds' exposure to the Brazilian currency was at 1.36% 'overweight', its highest level since January 2018, while that in Russian Roubles was at 0.35% 'underweight'.

Included among the trade which they believed were set to top-out was cable.

"GBP/USD has rallied to double resistance at 1.306-1.308, where tactical longs should be reduced or closed. An immediate breakout seems unlikely, but if spot were to close above 1.31, the weekly channel would be broken, pointing to 1.36."