If bonds consolidate, so will stocks – analyst

Bond buying went to far too fast, and if they consolidate, stocks are likely to consolidate as well, said Chief Strategist Dhaval Joshi in a BCA Research strategy report published Wednesday.

BCA Research analysts said they are bullish on bonds (NASDAQ:TLT) but given Fed Chair Powell’s latest comments about not yet declaring victory, the bond market rally “warrants a neutral stance.”

If bonds consolidate, the stock market (SP500), (COMP.IND), (DJI) will likely consolidate too, Joshi wrote.

“The markets have been celebrating the killing of inflation without the killing of the economy, but they have popped the champagne corks prematurely.”

Joshi explained that a bullish stance to bonds hinges on central banks “not letting inflation stabilize at a level meaningfully above 2% and slip-sliding into an era of inflation akin to the 1970s.”

Analysts expect a near-term consolidation of bonds.

“While the S&P500 has grabbed the headlines for reaching an all-time high, the post-October rally is mostly on the coattails of the bond rally,” Joshi said. “So, if bonds consolidate, stocks are likely to consolidate too, also warranting a tactically neutral stance.”

In addition, the USD/EUR (USD:EUR) is expected to rise since the Fed’s rate cuts are being pushed further than the European Central Bank’s cuts “and/or because any consolidation or sell-off in stocks will favor the haven greenback.”

William Murphy

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