BofA’s Hartnett sets three conditions for a return to risk-taking

Investors should stay risk-off until three conditions are met to reverse the tightening of financial conditions, Bank of America’s top investment strategist Michael Hartnett says, including the end of the central banks’ rate-hiking cycle, the 10-year U.S. Treasury yield falling below 4.5%, and oil dropping below $80 a barrel.

If November inflation and payrolls data are weak, Hartnett argues December hikes from the Fed, European Central Bank and Bank of Japan could be the last. A year-end rally in risk assets would then start around Thanksgiving. 

The strategists said the midterms ended one of the last bull convictions, that there would be no Democratic sweep. They said the result signals a "shift from populist capitalism to populist socialism," with taxes and regulation set to rise. 

Policies to improve affordability could challenge the consumer and AI capex booms, and Trump loses political capital to steer resources toward the AI race with China, they said. Voters want cheaper living costs, an end to war and slower data center growth.

The midterms favor gold over oil, tech bonds over tech stocks, consumer over energy stocks and small caps over monopolies, the strategists noted. They also favor Europe and China tech, and mark peak AI equity concentration.

Money market funds drew $140.4 billion in the week to Nov. 4, equities $89.2 billion and bonds $11.6 billion. Gold took in $100 million, while crypto funds lost $1.8 billion.

Global equity funds took in a record $265.6 billion over four weeks, driven by passive funds. U.S. equities drew $92.3 billion, the most since June, while Europe lost $6 billion, the most since July.

China stocks drew $34.5 billion on "national team" buying, a record $85.9 billion over four weeks. Tech funds took in $9.8 billion, with $44.6 billion over four weeks, the most since July.

U.S. equities saw a fifth week of inflows at $31.7 billion and EM a sixth at $45.1 billion. Japan saw a fourth week at $3.8 billion, while Europe had a fourth week of outflows at $1.3 billion.

Treasuries saw a 19th week of inflows at $6.5 billion, investment-grade bonds a seventh at $6.2 billion and TIPS a 40th at $500 million. High-yield bonds took in $2.2 billion in a second week. EM debt lost $6 billion, its first outflow in 14 weeks.