J.P. Morgan's Kolanovic says' bearishness is overdone', favors Asia, financials

Jan. 24, 2022 1:54 PM ETInvesco QQQ ETF (QQQ), SPYVPL, IPAC, XLF, EUFN, TBT, TLT, CEMB, EMB, VWOB, XME, DBC, JO, DJIBy: Liz Kiesche, SA News Editor37 Comments

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  • "Recent bearishness in equities is overdone, and out of line with activity momentum, easing bottlenecks, and what we expect to be a strong earnings season," J.P. Morgan strategists headed by Marko Kolanovic said in a note to clients.
  • The intensity of the downturn could also be good news that the worst is over, they said. Perhaps the market agrees. The three major U.S. stock averages pare their declines in mid-afternoon trading in New York. The Nasdaq (NASDAQ:QQQ) falls 2.7% at about 1:22 PM ET after dropping as much as 4.9% in Monday trading. The S&P 500 (NYSEARCA:SPY), down 2.5% recently, compares with a 4.0% decline earlier. And the Dow (NYSEARCA:DIA), recently off 2.1%, had lost as much as 3.3% earlier in the session.
  • "A combination of technical indicators approaching oversold territory and sentiment turning bearish suggest we could be in the final stages of this correction," according to the note.
  • The strategists are bullish on Asia equities, with the expectation that China policy will become more growth supportive.
  • They're overweight on Financials, excluding China, because earnings are leveraged to short rates and growth. "The selloff on margin concerns appears excessive," the note says.
  • U.S. bond trading has turned more bearish ahead of the FOMC meeting this week, with the gap to fair value narrowing in recent moves, they observe. J.P. Morgan strategists stay underweight on 10Y U.S. Treasurys on expectations that real rates will rise.
  • They also revise YE2022 Bund target to +30 basis points (from 10bps) and took profit on 5Y Germany vs. U.S.
  • Emerging market credit lags, especially in high yield, the strategists say. "Emerging market sovereigns are cheap vs. U.S. credit and Corporate Emerging Markets Bond Index (CEMBI) high yield is cheap vs U.S. high yield."
  • On the foreign exchange market, the U.S. dollar "looks lackluster."
  • Potential disruption in exports as a result of the Russia-Ukraine tensions points to upside Commodity price risks, with natural gas, oil, aluminum, PGMs, wheat and corn being the most exposed, the strategists write.
  • Some ETFs to watch: for Asia equities, VPL, IPAC; for Financials, XLF, EUFN, IXG; for Treasurys, TBT, TLT; for emerging markets corporate bonds: CEMB, EMB, VWOB; for commodities: MXI, IXC, XME
  • By contrast, Morgan Stanley's Mike Wilson advises a defensive stance amid market correction

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