HomeBank of America Survey Hints At Inflation as Tail Risk for Markets

Bank of America Survey Hints At Inflation as Tail Risk for Markets

BofA survey favours UK stocks that perform in rising rates environments. Energy firms and banks are among the sectors to benefit from upcoming rising rates.

The April Consumer Price Inflation (CPI) took market participants by surprise. The data showed that the prices of goods and services in the United States have increased four times more than expected during the course of only one month.

Moreover, the Core CPI, the piece of data that doesn’t account for energy and food prices, rose three times more than estimates predicted. This is important because the Fed uses the Core CPI data to compare against its inflation-targeting framework.

Traditionally, when the Core CPI exceeds the Fed’s target, the Fed prepares to raise rates. However, this is not the case as of yet, for at least two reasons.

Firstly the Fed is still buying $120 billion worth of assets every month. Hence, the easing continues.

Secondly, to raise rates, the Fed should signal the tapering of its asset-buying programme. Only after that we can talk about raising rates.

Banks, Miners, Energy Firms – Favored in a Rising Rates Environment

The FTSE 100 had a strong comeback from its COVID-19 lows. Now that inflation is rising in the United States, investment managers are looking to allocate a part of their portfolios to stocks that do well in a rising rates environment.

The rates may be far from rising, but investing is having a long-term horizon. Hence, managers allocate the capital far ahead of the actual monetary policy decision.

Rising inflation in the United States cannot leave the rest of the world indifferent. The US is the largest economy in the world, and it is likely that the other G10 economies will import at least part of the higher inflation, if not more.

Therefore the FTSE100 index’s recent move above 7,000 is seen partly as a result of UK stock indexes benefiting from the perspectives of rising rates. Mining companies, financial services and energy firms are favoured, while tech stocks allocation was cut, according to the BofA survey.

The 215 fund managers surveyed also cheered the end of the Brexit period and the speed of the UK vaccination campaign. Uncertainty, therefore, dissipated, and that is another positive for the UK stock market.

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