Market mood brightens ahead of Fed interest rate hike

Investors seem to ignore the approaching of the first interest rate hike since the financial crisis by the Federal Reserve, with the mood in the markets brightening.

However, in the week that ended on November 18 (before last Friday’s rally in stock markets), European equities were the only ones to enjoy strong inflows, worth $1.7 billion, according to Bank of America Merrill Lynch.

By contrast, investors redeemed $1.8 billion from US equities funds, while emerging markets equities saw their biggest outflows in 10 weeks, worth $2.4 billion.

Even Japanese equities funds, despite the continuing quantitative easing program of the Bank of Japan, saw modest redemptions of $36 million.

Analysts at TrimTabs say the outlook for the US stock markets is much brighter over the medium term than over the shorter term.

The fact that corporate share buybacks are strong underpins stock prices. Since the beginning of the month, new stock buybacks plus new cash takeovers have totalled $96.2 billion, 6.9 times new offerings, which were $14 bullion.

“It is encouraging that new stock buybacks averaged $3.9 billion daily in the earnings season that just ended, the second-highest volume since the start of the bull market,” the analysts at TrimTabs said in their weekly liquidity report.

There is a strong preference for large caps over mid caps and small caps, somewhat at odds with investors’ desire for yield.

The same ambivalence on risk and reward – with investors wanting higher yield but also safer assets — is seen in fixed income as well. Investment grade bonds saw their first outflows in six weeks, worth $800 million, in the week that ended on November 18.

For high-yield bond funds it was the second straight week of outflows, with $900 million redeemed from high-yield debt.

Emerging market bonds have seen outflows in 16 of the past 17 weeks, and last week lost $1 billion.

By contrast, commodities have experienced their largest inflows in 12 weeks, worth $1.1 billion, mostly via oil/energy funds.