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Jan. 21, 2021, 3:16 p.m. EST

These 2 triggers could bring the next round of market turbulence. Why Citi wants to buy the next dip

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By Jack Denton

Markets are continuing their optimism for fiscal stimulus from President Joe Biden’s new administration. The S&P 500 lifted 1.39% yesterday to a fresh high — the best Inauguration Day rise in 36 years — with gains continuing into Thursday.

It may not last. Our call of the day is from Citi’s /zigman2/quotes/207741460/composite C -1.63% report on investment themes for 2021, and the bank said there is “a significant likelihood of financial turbulence” coming to markets.

Equity index valuations are at elevated levels, potential credit downgrades are looming, and there is the possibility of inflation surprises this year, Citi said, underpinning strategists’ projections.

Financial valuations aren’t consistent with real-side measures like gross domestic product “by virtually all metrics,” according to the bank. This loads the gun for a turbulence trigger.

It could be inflation. The COVID-19 pandemic has laid the groundwork for inflation rates to be volatile in 2021. While Citi said there is “little underlying support” for sustained inflation, missing prices due to the effect of lockdowns and corresponding year-over-year base effects could scare markets.

A wave of turbulence could also be set off by slowing central bank purchases. Projections suggest that both the pace of purchases and net asset purchases will slow this year. Given the fact that net asset purchases are the main road between monetary policy and the real economy, Citi said that a modification to these patterns could surprise markets “no matter how hard central banks try to communicate in advance.”

Any turbulence is likely to hit equity and credit markets, according to the investment bank, because these asset classes are currently displaying volatility higher than recent norms.

So what should investors do? Citi recommends buying the next dip. 

The investment bank’s Global Bear Market Checklist is registering 8/18 red flags following the latest rally, which is the most markers since 2009. The U.S. market has 9.5 red flags while it is lower in Europe, with 5. 

That indicates a fair amount of “froth” in markets — the more frothy, the less inclined Citi’s model is to buy the dip. But it is still enough.

The buzz

Biden went to work on Wednesday reversing some of former president Donald Trump’s signature policies . He signed 15 executive orders, which include repealing the ban on immigration from majority-Muslim countries, revoking the permit for the Keystone XL Pipeline, and beginning the process of rejoining the Paris climate agreement.

Attention now turns to ushering a $1.9 trillion plan through Congress to aid the pandemic-ravaged economy, including sending $1,400 stimulus checks to Americans .

Online retailer Amazon /zigman2/quotes/210331248/composite AMZN -1.35% has offered to throw its weight behind the new government’s promise to increase distribution of COVID-19 vaccines across the U.S., saying that it could help Biden reach his goal of vaccinating 100 million Americans in the next 100 days.

On the economic front , all eyes are on the jobs reports released today. Initial jobless claims to Jan. 14 came in at 900,000, fewer than the 935,000 expected and a decline from last week’s 965,000 surprise. There were around 5 million continuing jobless claims to Jan. 9.

December’s housing starts numbers came in at 1.7 million, above expectations.

Three Chinese telecom giants — China Telecom /zigman2/quotes/206668971/delayed HK:728 -0.71% , China Mobile /zigman2/quotes/200868736/delayed HK:941 -0.49% , and China Unicom /zigman2/quotes/205091392/delayed HK:762 -1.36% — have asked the New York Stock Exchange to review its decision to delist them in accordance with a Trump-era policy.

$ 42.29
-0.70 -1.63%
Volume: 11.78M
Sept. 27, 2022 1:22p
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-1.55 -1.35%
Volume: 36.21M
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$1173.10 billion
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HK : Hong Kong
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$365.07 billion
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HK : Hong Kong
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$1052.67 billion
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HK : Hong Kong
$ 3.62
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Volume: 47.62M
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