KEY POINTS:

• Long Mag 7 is the most crowded trade for 54% of participants
• Long gold takes the second spot at 29%
• Global investors are the most bullish in 3 and a half years due to “run it hot” macro and policy expectations
• Allocation to stocks and commodities at the highest since 2022
• BofA says positioning is a “big headwind” for risk assets
• AI bubble remains the biggest tail risk

The Bank of America Fund Manager Survey is a monthly global poll of institutional investors, revealing sentiment, asset allocation and economic expectations to gauge market positioning and potential crowded trades.

THE REASON FOR SUCH EXPECTATIONS:

In the latest survey, we can see that Mag 7 and gold are the most crowded trades driven by the “run it hot” macro and policy expectations. That shouldn’t be surprising given Trump’s expansionary policies and continues attacks on the Fed to lower interest rates.

On the other hand, the Fed is also not doing much to counter the expectations by keeping a dovish reaction function. In fact, Fed Chair Powell in its latest press conference not only downplayed the inflation risk but emphasized the labour market weakness, suggesting that there’s more tolerance for higher inflation than for weaker labour market.

And adding to that, he stated that the debate among FOMC members is just about how much more to cut. This is called a “dovish reaction function” because they will cut rates in case we see more weakness in the data but won’t do anything in case things strengthen.

REPRICING IN RATE CUT BETS INFLUENCES THE SHORT-TERM:

This remains a tailwind for risk assets and gold in the medium-term. In the short-term, the repricing in the dovish expectations is what triggers the pullbacks/corrections.

In fact, the market’s expectations were very dovish going into the October’s FOMC decision, but Powell’s statement that a December cut was not a foregone conclusion triggered a repricing that weighed on risk assets. As soon as Fed’s Williams hinted that a December cut was coming, we saw a strong rebound across the board.

Now, we are in the same situation. We have the market pricing in 58 bps of easing by the end of 2026. That’s 33 bps more than what the Fed projected. This week we get the US NFP and CPI reports. The market might not like strong data as it would trigger a hawkish repricing in interest rate expectations and lead to a deeper pullback. On the other hand, benign or even soft data will highly likely support risk assets.