We fully expect a correction in US and global equities at some stage during the Autumn, but unless two or more of our risk-scenarios crystallize at the same time, we don’t think it will be more than 10%. There is too much residual momentum, especially outside the USA, and even after a correction, realised volatility will be below its long-run average.

International investors are still in love with Eurozone equities, but the strength of the euro is starting to cause problems for domestic investors. The euro is probably overbought in the short-term, but further strength later this year would cramp Eurozone earnings growth in 2018 and tighten monetary conditions in which would allow the ECB to delay interest rate rises and shrinking its balance sheet.

Europe, apart from the UK, is producing better risk-adjusted returns than most emerging markets. These have been flattered by favourable FX movements, but there are good fundamental reasons for this as well. Unless the euro gets too strong, we don’t see why investors would want to change a winning formula, anytime soon.

The new big idea is that Financials are responding to the prospect of a co-ordinated tightening of monetary policy which will steepen yield curves round the world. At a sector level, there is some superficial evidence to support this, but when we look are individual stocks, particularly in Europe, we see that there are other and better explanations.

We agree with consensus that an equity correction could happen at any time. However, we will not be buying the dip in the US. We much prefer the Eurozone, which has a habit of late-cycle outperformance. We also prefer Japan, which has just hit a new 22-year high, to EM, which keeps failing at resistance just above current levels.

We use excess volatility as the hurdle rate by which equities must beat bonds, in order to be risk-efficient. In the US, it has just hit a new low going back to 1995. In the Eurozone, it is at a new 20-year low. Risk conditions have never been more benign. This means that they are very likely to deteriorate, possibly quite soon. We also think that central banks want this to happen – but not too much.

We use excess volatility as the hurdle rate by which equities must beat bonds, in order to be risk-efficient. In the US, it has just hit a new low going back to 1995. In the Eurozone, it is at a new 20-year low. Risk conditions have never been more benign. This means that they are very likely to deteriorate, possibly quite soon. We also think that central banks want this to happen – but not too much.

The fate of the US Energy and Technology sectors may be linked together thanks to the simple mechanics of portfolio construction. Our data suggest that investors may be herded into two large positions relative to the benchmark: a big overweight in Tech and a big underweight in Energy. It will be difficult to reduce one without reducing the other. So a bout of profit-taking in Tech may lead to a bounce in the Energy sector. More importantly, a bounce in the oil price could cause the Tech sector to underperform.

While newspapers are fretting about the valuation of Technology stocks, our models suggest that there is a growing problem with US High Yield credit. This is not confined to the Energy sector and may soon impact US Investment Grade. Our previous note highlighted the importance of Investment Grade as an end of cycle indicator.