Red hot rally in stocks, risk assets has some way to run: BAML

LONDON (Reuters) - The powerful rally in global stocks and other markets is likely to persist until higher borrowing costs and a stronger dollar force investors to back off, Bank of America Merrill-Lynch’s analysts said on Friday.

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The U.S. investment bank’s weekly round-up of financial market flow tracking data showed $10.1 billion had exited U.S. stocks in the biggest move in more than nine months.

At a global level it was reduced to $4.5 billion by inflows elsewhere and came after $14.4 billion of worldwide buying the week before.

There was also $9.2 billion of inflows into bonds this week - the biggest amount in three months. The breakdown revealed money going into investment grade and emerging markets debt and the first inflows into riskier high-yield bonds in 10 weeks.

Invoking the figure from Greek mythology who flew with wings of wax too close to the sun, BAML’s analyst said: “(The) Icarus melt-up trade isn’t likely over and won’t be until rates (are) a lot higher and (there are) big redemptions in ‘yield’ plays.”

Mid-way through last year BAML was predicting a “Humpty Dumpty-style big fall” for stocks but seems to have shelved that call for now.

While the analysts stressed there was still a risk of markets overshooting, they said positioning appeared fine for now. A “Bull & Bear” sentiment gauge they calculate sits at 6.2, well below the 8 level when alarm bells start to ring.

BAML first-quarter targets are “bullish”, they added, due to expectations of 5 percent-plus U.S. real GDP growth in Q1 and Q2 and 20 percent growth in U.S. earnings per share.

Wall Street’s S&P 500 is seen reaching 2,860 points from its current 2,723 points, Nasdaq to 8,000 from just over 6,000 now and benchmark 10-year U.S. Treasury yields rising to 2.85 percent from 2.46 percent now.

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Reporting by Marc Jones; Editing by Gareth Jones