BofA Securities commodities strategist Doug Leggate made an important point about financial upheaval and the oil prices represented by futures markets,
“Spring Break in the Southern US [coincided with a] melt down in equities and an apparent liquidity squeeze indicative of an exit across all asset classes as funds move defensive.
“Non-financial cyclicals appear to be pricing in too much optimism: they are discounting a [global manufacturing] PMI of 60 [it’s currently 50] ; … Cyclicals implicitly assume we are early-cycle when in fact we are very late-cycle. Earnings revisions have been strongly supportive this year, but typically when relative earnings revisions have been at this level in the past, cyclicals have gone on to underperform the majority of the time. The macro red flags: The US yield curve last failed to predict a recession on this level of inversion in 1964. Lead indicators are consistent with a recession.
“With the caveat that news flow is still dynamic, Keith and team note that this scenario avoids the outcome where uninsured deposits aren’t available. But who are the winners? “Large banks are clear winners, and questions remain for smaller regionals…but the issue will be where that line is drawn”, Keith and the team caution. Keith goes on to explain that they prefer large-cap banks with strong diversified deposit franchises and clean asset quality, namely.
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