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Merrill Survey Finds Investors Braced For A Correction

Most investors are braced for a correction, but lower-than-expected inflation would come as a real shock, according to a survey Merrill Lynch conducted during the first week of June.

"I think that everyone came into this correction kind of almost expecting a correction," Global Emerging Markets Strategist Michael Hartnett said, commenting on investor's reactions in the survey on CNBC's "Squawk on Street." "You had a fabulous run in all equity markets from the March lows."

He added that equities still look cheap relative to bonds if you look at earnings yields across the world, though "the rise in yields has tempered people's appetite for risk" and made them more bearish on banks.

Even so, people now expect higher inflation and high growth figures, figures that become less of a surprise, he said.

"Perhaps the surprise during the summer would actually be lower-than-expected inflation. If that occurs, equity markets are going to hit new highs in Q3," Hartnett said.

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