The risk rally looks set to continue

The recent risk rally still has legs — at least that’s the case judging by the Bull & Bear indicator compiled by Bank of America Merrill Lynch.

The indicator is just leaving the bearish territory, slowly making its way up towards a middle position between extremely bearish and extremely bullish. It recorded a reading of 3.7 last week, up from its June 28 low of 1.6.

BullBear_July29The strategists at the investment bank said they would “get tactically cautious” when the indicator reaches 5.0.

Until then, however, assets considered risky such as emerging markets are enjoying the spotlight, despite the failed coup in Turkey and Brazil’s woes ahead of the Olympic Games.

Emerging market debt funds saw their largest four-week inflows on record, worth $14 billion. Last week alone, emerging market bonds received $3.4 billion in investors’ money.

The week that ended on July 27, the most recent for which data were available, was the fourth week in a row of inflows to emerging market equities. It is true that they were modest, worth only $400 million, but this marks the longest inflow streak since September 2014.

By contrast, European equities saw investors redeem $4.2 billion last week, which was the 25th straight week of outflows.

Japanese equities saw their second week of outflows, while a modest $400 million was redeemed from US stocks.

Fiscal stimulus will take the place of monetary policy in policymakers’ attempts to kick-start growth. The areas that will benefit the most are banks, commodities and value stocks, according to the investment bank’s strategists.

The reality that low and negative interest rates fail to spur growth is starting to dawn on policymakers. This should not have been a surprise, however: people have been conditioned for decades to spend prudently and save, and they still try to do that.

Because they get no return for their savings, they simply save more, and for longer, restricting consumption even further, especially in thrifty cultures like Germany. This hurts growth, achieving the exact opposite of what the easy money policy intends to do.

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