JP Morgan recommends tactical-long in banks, with short China-related cyclicals as a hedge

Strategists at JP Morgan recommended that clients go 'long' banks on a tactical basis while shorting China-related cyclicals and commodities as a head against policy tightening by the Federal Reserve, but warned them not to overstay their welcome in the former.

Acting as a backdrop, the broker cautioned that the US central bank´s current reaction function was acting as a dampener on equities, as evidenced by the price action seen in stockmarkets in the previous week.

On the one hand, "somewhat better data flow" led to the Federal Reserve opening the door to interest rate hikes. In turn, that boosts the value of the US dollar and places renewed pressure on the Chinese yuan.

However, any spell of weakness in the data automatically throws into question the ability of companies to deliver earnings in a sustainable manner, strategist Mislav Matejka and his team of analysts said in a research report sent to clients.

So, while the US consumer price index was likely to show a "clear" pick-up, positive economic surprises had been on the decline and some early US manufacturing surveys had printed beneath market forecasts, Matejka cautioned.

US Treasury yields need to rise for the right reasons

That, JP Morgan said, was reflective of the fact that US Treasury note yields needed to rise "but for the right
reasons, i.e. better growth, not a pickup in inflation."

In parallel, the loss of momentum in Chinese economic data reinforced his team´s view that clients should be 'fading' China-related cyclicals and commodities, while potentially going long banks.

Nevertheless, the then current spread between the yields on two and ten year benchmark US government notes - at its lowest since 2008 - meant "we would not overstay our welcome on the long leg of this trade", the broker added.

In parallel, JP Morgan said it had identified 88 members of the MSCI Europe index whose debt was eligible to be bought by the European Central Bank beginning in June.

That group of companies, which was weighted towards the Utilities, Staples and Real Estate sectors had already shown outperformance versus its benchmark since the ECB announced its purchases.

The ECB´s purchases, which stood in clear contrast to the Fed´s then current policy stance, "should be a relative help for some parts of the market."