BCA warns stocks may need a "meaningful selloff" to curb inflation pressures

Investing.com -- U.S. stocks and bonds are on a collision course, and only a sharp equity decline is likely to bring bond yields meaningfully lower, according to BCA Research, which warned that the global equity risk-reward looks poor.

In a note from Chief Strategist Arthur Budaghyan, BCA said that over the past 30 years, every time the U.S. two-year yield has crossed above the federal funds rate, the Federal Reserve's next move has been a rate hike.

With U.S. inflation rising, the firm warned that equity investors may respond negatively to Fed policy regardless of whether the central bank hikes or holds.

BCA Research believes "a meaningful equity selloff may be needed to generate enough disinflationary pressure to offset the inflation impulse from oil and food."

The firm framed a market decline not just as a risk but as a potential prerequisite for restoring balance between stocks and bonds.

The firm also flagged deteriorating market internals as a warning sign, noting that since late March, the global equity rally has been extremely narrow, led almost entirely by artificial intelligence and semiconductor stocks.

On currencies, BCA Research stated that the dollar is likely to remain firm in the near term, though its medium- and long-term outlook remains bearish.

Emerging market assets also drew a cautious assessment, with the firm saying both local-currency bonds and sovereign spreads look vulnerable in the current environment.

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