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BofA: Market sees 50-50 chance of recession

Traders work on the floor of the New York Stock Exchange.
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Traders work on the floor of the New York Stock Exchange.

Bank of America Merrill Lynch sees a 25 percent chance of a recession, but says the market is pricing in a 50 percent chance of a recession in the next 12 months.

"In our view, not only is fear trumping fundamentals, but the fundamentals for the equity market are worse than for the overall economy," the firm said in a note.

It also lowered the number of rate hikes it expects from the Federal Reserve, saying "'gradual' now means two rather than three or four hikes this year, we believe."

BofAML also lowered its expectations for the U.S. dollar, now forecasting the euro/dollar value to reach parity by the end the year, down from 95 cents, and the dollar/yen pair to end at 110 yen, from 120. It also lowered its year-end target on U.S. 10-year note yields to 2 percent from 2.65 percent.

The U.S. stock market has fallen sharply this year as growing recession fears and plummeting oil prices have weighed on investors.

The Dow Jones industrial average and the S&P 500 index are both down about 6 percent for the year, while the Nasdaq composite has fallen over 10 percent. On Wednesday, the Dow and the S&P were aiming for their first three-day winning streak of the year.

BofAML also said there is a 40 percent chance the Fed may have to either stop raising rates or cut rates before the end of 2016. "Unfortunately, the Fed is only likely to capitulate if there are either significant signs of further financial stress or clear signs that growth is dropping below potential," it said.