Global market correction due in Sept: BofA Merrill Lynch

After a decent rally in US markets, Mary Ann Bartels of BofA Merrill Lynch Global Research believes that fatigue is creeping in. According to her, the market is witnessing negative divergences. Given that September is historically the weakest month of the year, Bartels is of the opinion that another bout of correction awaits the market.

Bartel remains positive on the US dollar. “When we look at US equity market relative to every equity market in the world, the strongest market is the US, which means US assets are bid, which in turn, means the dollar is bid. We think the dollar is going to stay strong and that means it will go higher from here,” she said.

Bartel is also bullish on gold. “The key support on gold is between USD 1,550-1,500 per ounce. We have been bullish on gold since 2004. We are targeting USD 2,000-3,000 per ounce, and we still think we are on track for that target,” she added.

Below is the edited transcript of her interview to CNBC-TV18.

Q: We have seen a good summer rally; do you see it continuing or do you see any signs of fatigue creeping in?

A: I think the rally is close to its end. We are getting what is called negative divergences, we are not seeing price momentum confirm and we are seeing some of the major averages that have been leading the market not break out to new highs like the Dow and the S&P.

The Russell 2000 smallcap index hasn’t been able to break out. September, historically, is the weakest month of the year and we think there will be another correction then.

Q: What are the key resistance levels now for the S&P and Dow that one should be watching out for?

A: The S&P 500 is at the resistance level of 1,400-1,422, and that’s why we think the index is facing a hard time breaking through that 1,400 level. Every time we try to get above it, the market is selling off.

Q: Even European markets have had a constructive phase, what do you see on the charts of some of the European equity markets?

A: The problem with Europe is as long as the banks have an insolvency issue, it will be very hard to sustain rallies, because the risk is something which always is going to happen.

Definitely, the CAC and the German DAX are stronger markets, so is the UK. But the peripheries like Italy, Spain, we really don’t see any major signs of a bottom, some tactical rallies because they are oversold, but the risk is that they are not going to hold.

Q: Where does this leave the euro-dollar? Yesterday, we saw the first signs of a bit of a crack there from 1.24. Do you see it sliding once again?

A: We think the trend in euro versus the dollar remains down. The euro was trying to form what we call an inverse or bottom head and shoulders and it looks like it is trying to reverse out of that. So we still think we are going to go down and test 1.20 again and possibly 1.18.

Q: Do you see the dollar index moving higher in the near-term?

A: We think the US dollar will remain strong. In fact, when we look at US equity market relative to every equity market in the world, the strongest market is the US, which means US assets are bid, which in turn, means the dollar is bid. We think the dollar is going to stay strong and that means it will go higher from here.

Q: Crude has gone up to USD 113 per bbl on Brent. Do you see that rally continuing or extending in the near-term?

A: We don’t officially have year-end targets. We look at crude oil on WTI on a tactical basis, if there is a rally, crude may get near USD 100 per bbl. Our sense is that it is still in a trading range. If the world goes into a global recession next year, the risk is that crude may test somewhere between USD 70-74 per bbl. So we think there is more downside risk than upside risk on crude.

Q: You have been pointing out in a recent report that the global market is flushed with liquidity because hedge funds are increasing their weightage. Recent studies show that this might well continue in the near-term, pushing more liquidity into global markets?

A: As long as the market continues to rally, one of the areas that’s been buying has been the macros, but that’s because they have been underweight equities or short equities. So part of that is doing a catch-up trade. As long as the market stays up, yes, I think they are buying. But if we go into a correction, they will be fast and turnaround and sell.

Q: What kind of targets do you have on gold?

A: The key support on gold is between USD 1,550-1,500 per ounce. We have been bullish on gold since 2004. We are targeting USD 2,000-3,000 per ounce, and we still think we are on track for that target.