Bank of America strategists led by Michael Hartnett have outlined a compact list of market thresholds they believe could provoke policy action if breached, warning that rising geopolitical tensions and tighter financial conditions are beginning to reverberate through multiple asset classes.
In their latest Flow Show note, the strategists told investors to watch a group of levels spanning commodities, currencies, interest rates and equities. They recommended taking a contrarian approach should those levels be exceeded or violated. "We suggest fading oil >$100/bbl, US$ (DXY) >100, 30-year UST yield >5%, SPX <6.6k, levels set to provoke war/oil/Fed/tariff policy response to short-circuit Main St risks," the team wrote in a Thursday note.
The strategists point to oil as a near-term tightening channel for financial conditions. Higher crude has already altered market expectations around the Federal Reserve, according to the note. "Oil tightening financial conditions & Fed cut pricing out (June was 100% probability, now 25%)," the strategists said, and they added that the larger threat to equities may ultimately stem from earnings pressure rather than from inflation alone.
Hartnett's group also drew a parallel to the 2007-2008 period, observing that surging oil coincided with a compression of credit conditions prior to that crisis. They cautioned that if a sustained conflict coincides with stress in shadow banking, markets could face a stagflation-like scenario. The note did not assign probabilities to that outcome, but it did flag the combination as a material risk to market stability.
Despite those cautions, the strategists said overall market positioning has not yet displayed the levels of capitulation usually present at major lows. The team noted that the BofA Bull & Bear Indicator appears to have peaked and that risk-off flows are increasingly visible, especially in U.S. high-yield bonds, emerging-market debt and financial stocks. Still, they emphasized that broader positioning remains distant from extremes. The indicator has slipped to 8.7 from 9.2, remaining in sell territory and well above the sub-2 readings that historically accompanied major market troughs.
Other sentiment measures that typically accompany durable turning points have not reached the historical thresholds the strategists associate with a contrarian buy signal. They cited the absence so far of sharp, sustained equity and high-yield fund outflows or of a marked rise in fund-manager cash levels.
In aggregate, the bank's team described positioning as "still more bullish than bearish," reflecting what they interpret as a market consensus that the on-going conflict will be relatively short-lived and that policymakers will act to blunt a deterioration in financial conditions.
Still, fund flows are beginning to show signs of risk aversion. For the week through March 11, investors allocated $13.2 billion to equities and $3.4 billion to bonds, while cash funds attracted $800 million in inflows. Gold funds recorded $900 million of outflows and crypto funds saw $200 million of outflows, according to the strategists' tally.
Within credit markets, the movement was decidedly negative for risk-sensitive strategies. High-yield bond funds experienced $5 billion of redemptions, bank-loan funds recorded $2.4 billion in outflows, and emerging-market debt funds saw $3.1 billion withdrawn.
Regional and sector fund flows were mixed in the week under review. Korean equities enjoyed a record $8.9 billion inflow, while Japan drew $6.3 billion, the largest weekly inflow since 2013, the strategists noted. Conversely, financial stocks suffered a record $3.7 billion outflow. Technology funds registered their first outflow in seven weeks at $900 million, and healthcare funds posted their largest weekly redemption since July at $1.6 billion.
The strategists concluded that while risk-off signals are appearing in pockets of the market, the absence of extreme positioning means a full capitulation-driven bottom has not yet emerged. They reiterated their list of levels that, if crossed, could prompt policy intervention aimed at stemming the transmission of market stress to the broader economy.
Summary
Bank of America strategists led by Michael Hartnett identify specific asset thresholds - oil over $100 a barrel, the DXY above 100, 30-year UST yield above 5%, and the S&P 500 below 6,600 - that they say are likely to trigger policy responses. They report that higher oil has reduced Fed rate-cut expectations and that risk-off flows are visible in credit and certain sectors, even as overall positioning remains more bullish than bearish.
Key points
- Designated market levels could prompt policy intervention - particularly if oil, the dollar, long-term yields or the S&P 500 cross specific thresholds; sectors affected include energy, financials and equities broadly.
- Rising oil has tightened financial conditions and materially lowered market odds of a near-term Fed rate cut, altering expectations for rate-sensitive assets such as bonds and yield-sensitive equity sectors.
- Risk-off flows are evident in credit markets and certain equity sectors, with heavy redemptions in high-yield, bank loans and emerging-market debt, and significant outflows from financial sector funds.
Risks and uncertainties
- An oil price spike above $100 a barrel could further tighten financial conditions and pressure earnings-sensitive assets, particularly equities.
- A prolonged conflict combined with stress in shadow banking could create a stagflation-like environment, amplifying risks for credit markets and cyclical sectors.
- Although risk-off flows are visible, positioning has not yet reached the capitulation seen at prior market lows, leaving uncertainty over when a durable market bottom might form; financials and high-yield credit are particularly exposed.