Stock action shows confidence in central banks: BofA’s Hartnett

Investing.com -- Bank of America strategists say the stock market’s reaction to a new global tightening cycle marks a vote of confidence that central banks will succeed in restoring policy credibility.

Since Federal Reserve official Kevin Warsh turned hawkish at Jackson Hole, the 10-year Treasury yield has risen 60 basis points and the dollar has gained 2%, while stocks have dipped just 1%. The muted reaction represents good news, according to strategists led by Michael Hartnett.

Central banks worldwide are scrambling to restore credibility after a wave of monetary tightening — 60 hikes globally this year versus just 20 in 2025 — and the fact that the Magnificent Seven broke out to new highs right after the Fed’s recent hike suggests markets believe the effort will work, the strategists noted. The bad news, they said, is that this marks a genuine regime shift toward tighter policy after years of easy money.

BofA also flagged elevated risk in the bond market’s collateral system, warning that a 35% two-day jump in the MOVE Index, a measure of Treasury volatility, keeps the risk of a sudden deleveraging event high. They said a break in global financials below $125 combined with the MOVE index above 125 would signal a broader risk-off event is underway, as would a scenario where oil drops another $10 on a U.S.-Iran deal while yields keep climbing.

Hartnett laid out three scenarios for markets into year-end. In the bull case, which he called "Peace, Goldilocks, and Gridlock," Trump ends the Iran war, oil falls to $80 a barrel, inflation and Fed hike expectations peak, bond yields reverse lower, and Republicans hold the Senate, keeping the AI capex and consumer booms intact.

In the bear case, named "Bonds and Voters," Democrats take the Senate and win a tightening Texas governor’s race widely seen as a referendum on AI data center expansion, deepening a bond tantrum that ends the current boom, similar to how sharp yield spikes ended the Nifty Fifty bubble in 1973, Japan’s bubble in 1989 and the dot-com bubble in 2000.

BofA’s base case, "Debasement and Duration," holds that a policy-driven surge in yields remains the likeliest way the current boom ends, but with the administration determined to prevent that outcome and stocks now "too big to fail," he expects continued policy intervention to cap yields and oil, a negative for the dollar.

Under this scenario, Hartnett favors staying long commodities and EM assets, expects growth to keep outperforming cyclicals into the midterms, and recommends nibbling at "peak yield" plays including 30-year Treasuries, the Magnificent Seven, biotech, small caps, REITs and Hong Kong property.

Meanwhile, weekly flows showed a rotation out of stocks and into safer assets. Bonds drew $17.3 billion, cash $11.6 billion, crypto $3 billion and gold $2.3 billion, while $10.2 billion exited stocks, even as global equities remain on pace for a record $1.2 trillion inflow in 2026, well above the prior record of $949 billion set in 2021.

U.S. equities saw their biggest outflow since March at $21.1 billion, while tech and financials also posted their largest outflows since June and March, respectively.

On the inflow side, bank loans drew $1.7 billion, their biggest inflow since February 2025, and EM debt took in $4.7 billion, the most since June.

Original Article

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