The global business cycle is nearing a peak, leaving equity and credit markets at risk of a painful drop once the economic headwinds inevitably take hold.

Analysts at HSBC Holdings, Citigroup and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle. They cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data.

“Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,” Andrew Sheets, Morgan Stanley’s chief cross-asset strategist, wrote in a note published on Tuesday.

His bank’s model shows assets across the world are the least correlated in almost a decade, even after US stocks joined high-yield credit in a selloff triggered this month by President Donald Trump’s political standoff with North Korea and racial violence in Virginia.

Just like they did in the run-up to the 2007 crisis, investors are pricing assets based on the risks specific to an individual security and industry, and shrugging off broader drivers, such as the latest release of manufacturing data, the model shows. As traders look for excuses to stay bullish, traditional relationships within and between asset classes tend to break down.

He recommends boosting allocations to US stocks while reducing holdings of corporate debt that’s linked to consumer consumption and energy.

That dynamic is also helping to keep volatility in stocks, bonds and currencies at bay, feeding risk appetite globally, according to Morgan Stanley.

The US is in the mature stage of the cycle – 80 per cent of completion since the last trough – based on margin patterns going back to the 1950s, according to Societe Generale SA.

Citigroup analysts also say markets are on the cusp of entering a late-cycle peak before a recession that pushes stocks and bonds into a bear market.

Spreads may widen in the coming months but equities are likely to rally further partly due to buybacks, the strategists conclude.

“Bubbles are common in these aging equity bull markets,” Citigroup analysts led by Robert Buckland said in a note on Friday.

Bloomberg-The Washington Post Service

Published in Dawn, August 23rd, 2017