Despite central banks keeping interest rates at the lowest levels in history and buying debt like there’s no tomorrow, the mountain of debt is not getting any smaller. Emerging markets are, as usual, the place where people are looking for the first signs of trouble.
The European Central Bank (ECB) will find itself the only game in town soon. It is the only major central bank still buying bonds hand over first, and therefore it is dictating the pace for private investors.
The Bank of England’s decision to borrow Mario Draghi’s bazooka has had immediate consequences: investors rushed into bonds like they’re the best investment out there. And what else could they have done? Ever since the financial crisis, central banks have dictated where investors should put their money, picking winners and losers in the markets with their asset purchases.
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.
Equities were the big winners of the past week in terms of capital flows, while investment grade bonds continued to haemorrhage funds.
Stocks were technically oversold, and sentiment was on the brink of a “buy” signal last week, when at the same time there were weekly inflows into European, US and Japanese equities, according to flows data.
Capital flows data show that Greece was seen as a “buy the dip” opportunity in Europe last week, before the results of a referendum on the eurozone bailout offer were known.
Money shifted from bonds into equities for the second week running as the Greek debt crisis deepened, in what may be the beginning of the end for the decades-old bond bubble.
Capital flows showed a “bond massacre” is underway, with the largest weekly outflow from bond funds in 18 months, according to Bank of America Merrill Lynch.