After "looking at US Treasuries", BofA's Hartnett: Gold hedges "second inflation", best "reverse trade" is oil and non-ferrous metals

Due to the ongoing risk of economic recession, Michael Hartnett, a renowned strategist at Bank of America, has maintained a bullish stance on U.S. Treasuries this year, believing that monetary policy will become more accommodative in the next 12 months.

His predictions have proven to be accurate. Since Hartnett turned bullish on U.S. Treasuries, the yield on the 10-year Treasury has fallen by a cumulative 100 basis points, hitting a new low for the year at one point.

In addition to bonds, another asset that Hartnett is bullish on is gold. In a recent research report, Hartnett stated that gold is the "best hedge against accelerating inflation in 2025," just like in 2021 and 2022, where gold's performance as the best asset sounded the alarm for explosive inflation during these two years. He expects the price of gold to rise to $3,000 per ounce.

Historical data since the term of President Roosevelt shows that if the market is confident in the economy, it favors the stock market; if not, it favors gold.

The report points out that in the past 12 months, U.S. government debt has increased by $2.1 trillion, reaching 7.1% of GDP. Whether it is Harris or Trump who ultimately wins the U.S. presidential election, it will not change the trajectory of expanding U.S. government debt and deficits, leading the market to turn to gold in a risk-averse sentiment.

Hartnett also predicts that the best "contrarian trade" in the "first rate cut trade" is commodities, namely oil and base metals. He notes that in a scenario where the Fed cuts rates by 240 basis points over the next 12 months, commodities are the only asset class priced for a hard landing.

Taking the oil market as an example, the current market sentiment is worse than during the 2008 global financial crisis, the European sovereign debt crisis, and the peak of the global COVID-19 pandemic.

Overall, with the prospect of gradually easing monetary policy, Hartnett is bullish on the 3Bs: gold, U.S. bonds, market breadth (Bonds, Bullion, Breadth).

The report further states that the risk of an "hard landing" for the economy is underestimated, and even if the Fed only cuts rates by 25 basis points at the first rate cut, it will still cut rates significantly thereafter. It is expected that U.S. bond yields will further decline to the 3% level. Therefore, the most favorable strategy now is to "sell the first rate cut", and wait for a better timing to enter the market with risk assets Hartnett also mentioned that the decision on whether the US bond yield will rebound or fall next will depend on the next employment report, looking at whether the non-farm payroll employment in September is lower or higher than 100,000, which will largely eliminate uncertainty.

"Before that, risks will rotate, rather than differentiate or retreat."