BofA: This Is Our Biggest Concern For The Remainder Of The Year

In a time of what to most, if not the market - yet - appears to be a forming perfect storm of trade wars, quantitative tightening, record global debt, a "terrible trio" of rising rates, oil price, and a surging dollar, Bank of America's European credit strategist Barnaby Martin has laid out what he believes is his biggest concern for the remainder of the year – and the downside risk scenario: an escalation in trade tensions between the US and Europe.

As increasingly more economists have pointed out in recent days, President Trump is only likely to back down on trade skirmishes once visible signs in the US emerge of either economic, market and/or political pain. And one look at the S&P 500, which is just shy of 2,800 and all time highs, these signs have been lacking.

But, as Martin notes,  if the US/Europe tit-for-tat trade dispute progresses to autos, or even a broader range of goods, then it is likely to be growth-sapping for the Eurozone.

Our economics team highlight that these scenarios could lower Eurozone growth by between 0.3% and 0.7% (depending on the range of US tariffs and the response of the currency). Yet Eurozone growth next year is forecast to be just 1.7%.

In other words, US-EU trade wars could crimp Eurozone growth to the extent that the economy would only be growing marginally above its long-term trend rate of growth (~1%). This would imply slower progress in reducing economic slack, keeping inflation subdued.

But as Martin warned two weeks ago when he explained why, in his view, Europe simply can not have any more recessions - and thus QE can not end - for the simple reason that some €800BN in BBB rated bonds are in danger of becoming fallen angels, resulting in a corporate bond crisis...

... a slowing of inflation momentum in Europe would risk the market pivoting to worrying about debt levels again, i.e. realizing just how massively mispriced everything is with QE over.

To Martin, "this would be the “Quantitative Failure” narrative."

Meanwhile, as the IIF updated just yesterday, there are still many market fragilities when it comes to debt levels after years of loose monetary policy (or rather, as Bloomberg again explained today, the record debt is there because of central bank policies) . The next chart from Martin shows total non-financial sector debt by country, split by government, corporate and household debt.

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