Investors are beginning to position for the first increase in interest rates by the Federal Reserve since the financial crisis, and it looks like the market may spend this week in the doldrums again.
It is striking to see that even before two major central banks acted to ease monetary policy further, capital kept flowing back into risky assets. It makes you wonder why these central banks are acting — since there is no fear in the market and everything seems fine — and whether they are leading or actually following what’s really going on in the markets.
Despite evidence of further flows of funds into risky assets, there are signs that market interest rates are beginning to rise independently of central banks’ intentions, and this is troubling.
Here we go again. As the Federal Reserve’s rate hike is pushed further out into the future, high-yield debt funds saw their biggest inflows in eight months last week, prompting analysts at Bank of America Merrill Lynch to say it’s “junk-on” time.
Emerging market equities posted their smallest outflows since July last week, proving that weak US nonfarm payroll data was a good thing for the asset class, as it means the Federal Reserve will not hurry to raise interest rates.
The third quarter that ended last week brought more clarity on who were the winners and losers for the markets.
Investors are operating in “blue screen safety mode,” as they wonder what to do next amid the collapse in confidence in the markets, Chris Tinker, co-founder at Libra Investment Services, said.
This year could turn out to be the first year after 1990 when cash outperforms both stocks and bonds.
An investor survey showed such “unambiguous pessimism,” that either risk assets are ripe for a rally or the markets are positioning for a recession and/or an imminent debt default, according to Bank of America Merrill Lynch research, which carried out the survey.
Outflows from emerging markets continued last week, as did the deterioration of investor sentiment.
China cut its economic growth estimate for last year, and although the revision was minuscule, it was enough to send jitters through markets again.