A re-acceleration in US growth may be the catalyst for a broad drop in financial markets

Bonds look especially vulnerable to any upside surprise in inflation and/or re-acceleration of US growth which mean rates go up faster than currently expected. Given historically low yields, tight spreads and still extreme leverage, the risk/reward for bonds looks unattractive, and perhaps now reflects a degree of complacency and over-confidence in central banks. Of course US equities would not be immune from any correction in bond markets, especially in light of their vulnerability to a rising US dollar, and we see better relative value in Europe and Asia as this plays out. That said U.S. equities can ultimately continue to rise over the medium term as improved economic fundamentals drive corporate revenues and underpin valuations. (VIEW LINK)