US equities look set for further falls this week

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.

Capital flows data analysed by Bank of America Merrill Lynch show that equities in Europe – where the European Central Bank (ECB) is in full quantitative easing mode – are booming, having seen $1.7 billion going in last week.

European equities have seen inflows in 24 of the past 26 weeks.

By contrast, US equities saw small outflows, worth $300 million. These were made up of $2.9 billion outflows from mutual funds, which counteracted $2.6 billion worth of inflows via exchange-traded funds (ETFs).

Japanese equities saw small outflows worth $100 million, their first redemptions in the last four weeks.

Looking at sectors, financials are in their fourth straight week of inflows, with $200 million going in, while technology stocks saw $500 million going in, in their fifth straight week of inflows. Utilities saw $500 million in outflows.

Investors are less bearish, but despite this, market action was ugly last week.

Sentiment is improving, but the outlook is still gloomy. Source: Bank of America Merrill Lynch.

Sentiment is improving, but the outlook is still gloomy. Source: Bank of America Merrill Lynch.

The S&P 500 fell through its 100-day moving average last week, down 3.6%, while the Nasdaq fell more than 4%. High-yield bonds sold off, and so did commodities.

Analysts at TrimTabs Investment Research point out that the market may face a seasonal problem in the coming week: a heavy calendar for new offerings.

In the past decade, they say, new offerings in the week before Thanksgiving week averaged $10.5 billion — above the weekly level of $10 billion that “tends to give the market indigestion.”

For this week, nine deals, including eight IPOs, are scheduled and are expected to raise $1.7 billion, according to Dealogic.

“Overnight deals could be more plentiful as underwriters try to book as many commissions as they can before the holidays,” the analysts at TrimTabs say.

However, the outlook for one to two months ahead is much brighter, due to the fact that companies have been solid buyers of their own shares, helped by the record low interest rates offering extraordinarily cheap credit. This generally bodes well for the indexes.

Looking at other asset classes, in fixed income emerging market debt funds saw big outflows worth $2 billion in the week that ended on November 11, the largest in 10 weeks.

This was the first week after the very strong nonfarm payrolls data for October was released. The data signals that the Fed could be on track to raise rates in December.

High-yield bond funds saw their first outflows in five weeks, worth $500 million.

Investment grade bond funds saw $400 million worth of inflows, their fifth straight week to see money going in.