There have been “massive” outflows from capital markets in the past week, but although they brought Bank of America Merrill Lynch’s “bull and bear” indicator close to the “buy” signal, they haven’t managed to trigger it.
The magnitude of the withdrawals is something to watch: equities saw their second-largest outflow ever, worth $29.7 billion, according to data analysed by BofAML. Of these, outflows from US stocks were the third largest ever, at $24.2 billion.
European stocks, a big disappointment for many investors, saw their 16th straight week of outflows, with $3.9 billion going out. Emerging markets also saw withdrawals worth $3.1 billion.
The only region where equities saw big inflows was Japan, with $2.6 billion going in.
Looking at sectors, technology, consumer and utilities saw some money going in, whereas real estate, energy, materials, healthcare, financials saw significant withdrawals of capital.
Obviously, this is a “risk off” withdrawal. Investment grade bonds did relatively well in the week, having received around $2.9 billion. Emerging market bonds and high yield bonds, which are considered risky, saw outflows worth $3.2 billion and $2 billion respectively.
Turning to the “bull & bear” indicator, the only component that is very bullish is that of credit market technicals. Next, hedge funds positioning is bullish, whereas equity flows and long-only positioning are bearish, and equity market breadth and bond flows are very bearish.
This is why the indicator fell tantalisingly close to the “buy” signal, which is triggered once it falls under 2.0.
Investors should watch out: this situation has echoes of 1998, when the Asian financial crisis started and hedge fund Long-Term Capital Management (LTCM) collapsed, the BofAML analysts warned.
“Fed tightening, US decoupling, flattening yield curve, collapsing emerging markets, outperforming levered quant funds…all echoes of 20 years ago,” the analysts wrote in a report.
Signs of distress to look for are: “vicious” credit contagion and spread widening, further pressure on the Chinese currency and the Hong Kong dollar’s peg, insensitivity to falling bond yields (they fail to revive equities), unwinding of “crowded” positions like long US tech and short government bonds, and finally, panicking central banks.