Last week, JPMorgan said we're not that far from a "picture perfect world."
Now, BofA Merrill Lynch is out with a new report, titled "Buy America: The American dream is back."
BAML strategists Ralph Preusser and Athanasios Vamvakidis write (emphasis added):
Markets have fallen in love with the US. This is a significant change from spending the last five years wondering which economy was the worst, the US, Europe, the UK, or Japan.
After repeated positive US data surprises in recent weeks, and particularly the very strong non-farm payroll number last Friday, buy America has become the main market theme, with the USD appreciating and US equities reaching new highs.
The US housing market is also beginning to show signs of a sustainable recovery (see Housing Watch).
The strong US performance despite the substantial fiscal tightening in the months ahead as the sequester kicks in makes the US even more attractive. Just imagine how faster the recovery would have been if the US had a better fiscal policy.
Our bullish USD view for 2013 has so far turned out to be right for the wrong reasons. We have been concerned about the impact of fiscal tightening on the US and the global economy, expecting an increase of demand for the USD in a risk-off market correction. However, the strength of the US recovery so far this year has surprised markets and the correlation between risk appetite and the USD has now turned positive. This has helped our EURUSD straddle trade originally recommended two months ago (see FX Alpha).
The comeback of the dollar – and specifically, this return to positive correlation with stocks – has been a hot topic.
Preusser and Vamvakidis continue:
We have now introduced a short EURAUD recommendation, to take advantage of the current benign environment of rising equities, improving US data and declining volatility (see FX Alpha). For rates investors, we would watch out for what the Fed thinks about the recent improvement in the housing market and its implications for wealth and eventually the labour market, rather than what the equity market thinks (see Liquid Insight).
Big Picture Theme 1 argues that the recent simultaneous advance of the USD and equity markets suggests the possibility of a new norm that may be driven by expectations of US energy independence. The market implications of such a shift could be profound and we are bullish the USD and US cyclical assets, bearish oil and FX vol, and bearish TIPS breakevens.
In other words, it's a lot of the same broad trade recommendations we've heard from several other analysts.
Long the dollar. Long stocks. Short bonds.
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