BCA Research is urging investors to be cautious about the recent rebound in European equities and German bond yields, warning that the effects of the yen carry trade blowup are far from over.
According to BCA, while the stabilization of the yen has led to a temporary relief rally, with investors flocking back to stocks and selling bonds, this move is “misplaced.”
They state that the unwinding of yen carry trades triggered a global market sell-off, and BCA believes this will have a “lasting negative impact on global liquidity conditions.”
This shock to liquidity, they argue, will soon crystallize the risks to global growth that they have been highlighting for months.
Given this outlook, BCA advises investors to “fade the rebound in European equities and German yields.”
They also see the current strength in the euro as a selling opportunity. With the EUR/USD exchange rate reaching 1.10, BCA views this level as “an attractive selling opportunity,” adding that EUR/JPY is also “vulnerable to additional downside.”
When it comes to bonds, BCA notes that while the worst may be over for French bonds, the spreads over German bunds will remain volatile.
However, they recommend continuing to favor Spanish and Italian bonds over French ones.
Overall, the investment research firm believes that the yen carry trade blowup is just the beginning of a broader impact on the global economy and financial markets. As a result, they recommend selling the euro and fading the recent rebound in European stocks and German bond yields.
