According to Morgan Stanley’s European equity strategist, Graham Secker, we may have just hit peak bearishness. However, does that mean that a rebound in risk sentiment is imminent, or is this just the beginning of a multi-decade mean reversion, one that will seek to unwind years of central bank intervention, and push risk assets to their ex-central bank prop fair values?

We don’t the answer just yet, although it seems unlikely that after one humiliating episode in recent months for the ECB, Fed and BOJ, each, they will simply pack up and go.

For now, however, here is Morgan Stanley, with a summary of not only why everyone is “peak bearish”, but why the one potential downside catalyst most are ignoring, namely Europe, is about to take its rightful place in the pantheon of risk factors for 2016.

A Sleuth of Bears

We struggle to remember many occasions when investor sentiment was quite as bearish and widespread as it feels today. Sure, 2008 was worse as the global financial crisis and fears of global depression created panic in markets, but today’s cool disdain for risk assets still takes some beating. When we were asked by a client this week what reason bullish investors were citing for their optimism, we had to confess that we couldn’t answer as we hadn’t met any in recent times. The collective noun for a group of bears is a ‘sleuth’, but it doesn’t take much detective work just now to identify what investors are concerned about.

Moderating growth expectations are likely one reason for this more cautious approach, although it’s hard to argue that we’ve seen a step-change down in the macro data. From our seat we believe that current concerns reflect a rising probability of a ‘bear case’ outcome as much, if not more, than a more muted ‘base case’. For us the most plausible bear case outcome, aside from general economic recession, contains a mix of China policy concerns (especially FX), USD strength, falling commodity prices, poor EM newsflow and asset performance, and geopolitical uncertainty including the US presidential election and Brexit. A number of these attributes have featured highly in market newsflow in recent weeks.