Central banks cannot paper over the cracks of populism

Central banks are trying to prolong the decade-old bull market, but it looks like instead of reassuring investors, this makes them nervous.

The European Central Bank (ECB) last week joined the Fed and surprised markets with more dovish than expected statements. In the old days, this would have sparked the mother of all rallies. This time, the ECB’s moves were cited by some in the market as reasons for selling, not buying.

But even when spooked, investors are still following the same pattern: invest in debt, be wary of equity. This was the worst start to the year for flows into shares since 2008, according to researchers at Bank of America Merrill Lynch.

Last week, $8.8 billion poured into bonds, whereas equities saw $10.1 billion going out.

For investment grade bonds, it was their fourth biggest week of inflows on record, with $9.5 billion going in. Emerging market debt saw inflows of $1.6 billion, whereas government and treasury bonds saw their largest outflows since September, worth $2.4 billion. High yield bonds lost $500 million.

On the equities front, US stocks saw $5.5 billion going out, followed by European stocks with $3.1 billion and Japanese equities, with $1.8 billion. It was the fourth week of outflows for Japanese stocks. Emerging markets saw a small inflow of $500 million.

Looking at sectors, the winners were energy, technology, financials, real estate and materials, which all saw money going in. Investors sold shares in the consumer, healthcare and utilities sectors.

The Bull & Bear indicator fell for the first time this year. It is now at 4.9, in neutral territory.

The Bull and Bear indicator fell for the first time this year

The Bull and Bear indicator fell for the first time this year, from 5.1 to 4.9. Source: Bank of America Merrill Lynch.

The indicator’s components show a mixed bag. Long-only positioning is very bearish, hedge fund positioning is bearish, whereas equity market breadth is neutral. Credit market technicals are bullish, whereas equity and bond flows are very bullish.

The Bull & Bear indicator’s neutral stance and mixed sentiment is illustrative of the markets’ current mood. Despite central bank’s efforts to reignite the previous euphoria, reality is beginning to set in. And no matter how much money central banks create out of thin air, that cannot take the role of the real economy.

As politicians seem to have gone crazy all over the world with populist promises and disregard for reality, investors are drawing their horns in. No amount of central bank stimulus can persuade them to put money in uncertain projects.