Regency Associates says the sense among investors that the global economy is not doing as well as they may have thought will have been amplified by the weak US nonfarm payrolls number for September and, consequently, they are expecting another wave of selling pressure in risk assets particularly in equities.

The firm expects US and German treasury yields to fall as markets price in lower interest rate expectations if the Fed postpones rate hikes until 2016.

“There is no doubt that equities are still chronically overpriced,” said Shem Orbison, chief economist at Regency Associates. “The top 10-20% of the value of the Dow and the S&P is based primarily on make believe and quantitative easing and the only way those markets get to keep those valuations is more QE. In the absence of QE, the selling will resume and we wouldn’t be surprised to see another 10-15% shaved off stocks,” he added.

Orbison’s comments flew in the face of the strong rally in stocks on “Jobs Friday” when, despite the weak data, stocks recovered from 1-1.2% falls to end the day up by as much as 1.3%.

“The reversal was based on hope and, perhaps, a realization that the poor nonfarm payrolls data could mean US interest rates remaining lower for longer and, potentially, lay the ground for another round of monetary stimulus further out into next year. Regency Associates thinks that’s a distinct possibility but there’s much more Fed theater to come before we get to that point,” explained Orbison.

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