If this is not yet capitulation, it sure feels like it. Money has been fleeing stock markets at record speed, and despite dovish signals from the Federal Reserve, investors are still not taking advantage of the buying opportunities the panic in the markets are throwing at them.
Redemptions from equity funds reached a record of $39 billion last week, according to capital flows data analysed by Bank of America Merrill Lynch.
Brexit uncertainty led to record outflows of $9.8 billion from UK equity funds last week. Across the ocean, President Donald Trump is no longer bragging about the stock market: US equity fund redemptions were the second-largest ever last week, at $27.6 billion.
What about bonds? Well, so much for asset purchases. The European Central Bank’s bond-buying programme ends this week (on December 19), but if you judge its success by bond yields, it’s as if it never happened: spreads are back to the levels of March 2016, when the ECB announced it would start buying corporate bonds.
This was “an expensive round trip”, in the words of analysts at Bank of America Merrill Lynch. They note that the ECB has bought more than €2.6 trillion across various asset classes during its over four years of intervention in the markets.
As a reminder, the programme started in the autumn of 2014 with purchases of covered bonds and asset-backed securities; it was expanded to government bonds in March 2015 and to corporate bonds in June 2016. While it was going on, it worked like magic: it maintained volatility low and led to a flurry of new bond issues, both by governments and by companies.
But now the magic is over, and markets do not like this. Year to date, redemptions from corporate bonds, both investment grade and junk-rated, have reached $63 billion – a record high.
Contrary to expectations, banks are not doing better as interest rates increase. Last week was the fourth-largest ever for outflows ($2.1 billion) from financial stocks.
So, is it time to go out there and buy yet?
The Bull and Bear indicator is getting close to triggering the “Buy” signal, but it’s not quite there yet. Outflows from high yield corporate bonds and emerging markets have been too weak to push it in such bearish territory, according to Bank of America Merrill Lynch’s analysis.
Of the indicator’s six components, two are very bearish: equity market breadth and bond flows. One – long-only positioning – is bearish, while credit market technicals and equity market flows are bullish, and hedge fund positioning is very bullish.
If in the next couple of weeks redemptions from emerging markets equities reach $11 billion and fund managers’ cash levels exceed 5.4% (from the current 4.7%), the indicator can breach the 2.0 “Buy” signal, the Bank of America Merrill Lynch analysis shows.