BofA’s Hartnett Sees Risk-Off Mood Lasting Until Dollar Peaks

(Bloomberg) -- Investors are set to shun riskier trades until the dollar's recent surge shows signs of peaking, according to Bank of America Corp.'s Michael Hartnett.

Writing in a note, the strategist also suggested that market jitters are likely to persist until rising bond yields ease from their highest levels in more than two decades. He recommends to "buy the humiliation" by starting to add some bonds to portfolios.

The Bloomberg dollar index has risen 3% from a September low as investors have started to re-build cash cushions by exiting positions in riskier assets. That's been accompanied by a rise in bond yields, driven by a mix of inflationary pressures from the Iran war, with markets anticipating more monetary policy tightening ahead, as well as strong corporate earnings growth.

READ: Dollar Wraps Best Month Since March on Fed's Inflation Fight

Hartnett said that while recent price action suggests that markets have been cutting leverage and reducing risk, there's likely a floor in the form of more aggressive Treasury buybacks from the US administration — particularly if rising yields were to threaten the AI investment boom ahead of the US midterms in November.

Downside risks would become more worrying if small and mid-cap stocks joined banks in their steep decline, Hartnett said. That would indicate that optimism about strong economic growth has peaked, ultimately weighing on technology stocks, he said.