The prices of bonds and equities seem to be higher than they should be, and may soon tumble, says the Wall Street firm’s strategists.
The reason: Brexit. A team of Goldman analysts led by Christian Mueller-Glissmann wrote in a note to clients that markets have treated the referendum as a largely localized economic event that is likely to cause central banks to ease further. But if the central banks don’t lower interest rates, or Brexit ends up having a broader economic impact on the global economy then there could be trouble.
“Bonds could sell off sharply as a result of central bank disappointment, positive inflation and data surprises and/or illiquidity, which would likely drive weakness in equities and other risky assets, at least initially,” the team wrote. “Equities could sell off owing to negative growth surprises and with yields at all-time lows, bonds are unlikely to be good hedges.”
"We remain cautious with our allocation of liquidity in a portfolio. During this moment, the best way to form a portfolio, is by buying different currencies."
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