The strategists of Bank of America (BofA) have issued a serious warning about the state of global markets. In its latest report ‘The Flow Show’, the entity points out that the Overly optimistic expectations and clearly bullish positioning are colliding with a «maximum liquidity» environmentwhich begins to generate signs of overheating in various financial assets. «Bullish positioning in risk assets has been hit by liquidity at its peak and due to the dismantling of ‘carry trade’ operations»states the bank, in one of the key phrases of the report. Analysts point out that this «bubble» phase is closely related to two simultaneous dynamics: the accelerated depreciation of the Japanese yen and the massive expectation of rate cuts in the United States and other developed countries. According to the entity, «crypto, credit, dollar and private equity are operating in an environment of peak liquidity; animal spirits driven by the massive rate cuts of the last two years.»
JAPAN, EPICENTER OF PRESSURE
One of the hotbeds of tension identified by BofA is Japan. The report warns that The Bank of Japan will have to act strongly to stop the rapid weakness of the yen and avoid a phenomenon he describes as ‘debasement’ (currency degradation). Strategists point out that Japanese sovereign bond yields already suffering worst year since 1970sas the yen approaches 40-year lows against the dollar. This combination is accelerating the closing of carry trade operationswhich had fueled part of the global appetite for risk.
THE FED, IN THE SPOTLIGHT
In the case of the United States, Bank of America states that the Federal Reserve (Fed) will have to cut rates faster than expected to avoid major problems in the financial system. The report indicates that some segments of the US market – especially banks and brokers – could become early indicators of systemic stress if the Fed does not act: «As in December 2018, the quickest path to Fed capitulation begins when banks and brokers begin to discount a ‘liquidity event.'»
CRYPTOCURRENCY WARNING
The bank also highlights the role of cryptocurrencies as a thermometer of excess liquidity. Although they represent only 0.4% of institutional portfolios, they have become an asset dominated by retail investors and derivative speculation. «Cryptos are on the border of liquidity and speculation and will be the first to detect the arrival of the Fed bailout,» the report warns. Bitcoin falls 30% from its highs of the year and ether falls 41%, which Bank of America interprets as an early sign of exhaustion of the global liquidity cycle.
A MARKET THAT HAS GROWN DUE TO LIQUIDITY, NOT DUE TO FUNDAMENTALS
Bank of America also reminds that The 2025 stock market rally has been largely supported by the fall in the cost of capitalin the rise of investment in AI and in the perception that governments will support certain strategic sectors. But the entity emphasizes that this growth has been very uneven: only 37% of the S&P 500 values have managed to beat the index this year, according to the report graph. At the same time, BofA’s Bull & Bear sentiment indicator stands at 6.2, a clearly optimistic level for the entity, supported by an intense inflow of flows into equities, commodities and risk assets. The bank’s final diagnosis is clear: the market is showing evident symptoms of exuberance supported by liquidity. And the combination of a sinking yen, expectations of massive rate cuts and extreme risk taking creates a breeding ground that Bank of America considers dangerous. In the words of the report itself, investors are in a «peak global liquidity» scenariowhere complacency can quickly transform into systemic volatility if central banks do not act in time.
