Bank of America Merrill Lynch Global Research highlights the current market risk-off sentiment despite the recent risk-on rally since late summer.
"Recent market experience has demonstrated that, for both investors and policy makers, the margin for error is getting smaller and smaller. While price action across macro markets has been more risk-on since late summer, sentiment is risk off. This is especially true given the market cross-currents experienced in recent weeks (eg, USD funding squeeze). Meanwhile, the market is dealing with trust issues with the Fed, and the Fed is dealing with communication issues with the market," BofAML notes.
"We have four investment recommendations to position for the above theme, which do not require heavy balance-sheet usage: (1) buy vol; (2) curve flatteners; (3) Eurodollar calls; and (4) sleep well ahead of a potentially volatile 4Q," BofAML adds.