A note put out today by the Bank of America Merrill Lynch research team invokes the Greek myth of Icarus in referring to the potential for one last ‘melt-up’ in the early part of 2017 before a sharp fall in markets.
The bank said its current tactical view is that after ‘a wobble’ in January or February, stocks and commodities will have one last 10% spike in the first half of 2017, followed by a ‘meltdown’ some time later in the year.
It is a colourful and potentially very insightful analogy.
As we know, Icarus was overconfident in the robustness of his newly-constructed wings, and against his wise father Daedalus’ advice flew too close to the sun, resulting in the wax holding said wings together melting and him plummeting from the sky.
Putting the story into investment terms, it it certainly feasible that investors are chasing a bull market upwards ‘too close to the sun’, and the resulting overheating that may occur could quickly undo whatever glue is holding markets together, resulting in a precipitous fall.
While it will not be the the sun being too warm that undoes markets as it did with Icarus’ wings, (certainly not in the United Kingdom) there are some candidates to play the role of the sun in this tale.
Chief among them is monetary policy both across the Atlantic in the form of Federal Reserve action, and over the Channel at the European Central Bank. If either central bank were to move quicker or more aggressivley than currently anticipated, that could very conceivably be received as a loud and clear starting gun for a big sell-off.
Any fresh worries over China’s economy or another unexpected election result either in the Netherlands or France are also good candidates for this.
