Cash flowed into the US stock market at a pretty fast clip last week with Lipper reporting that US stock funds received $9 billion in new allocations. Bond funds didn’t miss out entirely though with $4.2 billion of inflows. If we just looked at the Stock flow we’d say the market is bullish. If we just looked at the bond flow we’d say the market is still concerned about stocks. Taken together though we think this means cash which had been on the sidelines is being redeployed as fear recedes and as Bernanke’s zero rates and unconventional monetary policy is working and forcing people into the markets and out of safe havens.
In a not unrelated sign and possibly the best sign that the euro rally may have some legs and underlying support the Swiss Franc slipped to the lowest level in a year with EURCHF rising to 1.2201 the strongest since Dec 2011. The change in euro sentiment was nicely summarised by a quote I saw on the Wall Street Journal this morning:
“PEOPLE WERE OVERLY FEARFUL OF THE EURO ZONE, AND NOW THIS FEAR IS STEADILY RECEDING,” WHICH HAS LED TO A DROP IN THE SWISS FRANC, SAID SEBASTIEN GALY, A CURRENCY STRATEGIST AT SOCIÉTÉ GÉNÉRALE IN NEW YORK.
The WSJ also reported a UBS note which said that Swiss investors who had been repatriating their cash for the past two years are now reversing those trades. As I have noted recently these moves don’t mean that Europe is out of the woods fundamentally but rather that the market views the chances of a European implosion and Grexit or Spexit as having reduced materially.
With the VIX Volatility index on the S&P500 at its lowest level since around 2007 it is clear that fear is receding across all markets. Indeed the fact that the Australian Dollar can’t benefit at the moment and is lagging the “risk” rally also suggests that perhaps money is flowing out of the safe harbour that has been the Aussie dollar and Australian assets.
Merril Lynch strategist Michael Hartnett is apparently calling the moves we have highlighted above, including soaring Junk Bond prices, as the “Great Rotation”. This may be slightly hyperbolic but it does summarise what is occurring nicely.
Indeed we saw that Esther George who is President of the Kansas City Fed (Hat Tip WSJ) had given a speech about this very topic.
A LONG PERIOD OF UNUSUALLY LOW INTEREST RATES IS CHANGING INVESTORS’ BEHAVIOR AND IS RESHAPING THE PRODUCTS AND THE ASSET MIX OF FINANCIAL INSTITUTIONS. INVESTORS OF ALL PROFILES ARE DRIVEN TO REACH FOR YIELD, WHICH CAN CREATE FINANCIAL DISTORTIONS IF RISK IS MASKED OR IMPERFECTLY MEASURED, AND CAN ENCOURAGE RISKS TO CONCENTRATE IN UNEXPECTED CORNERS OF THE ECONOMY AND FINANCIAL SYSTEM. COMPANIES AND FINANCIAL INSTITUTIONS, SUCH AS INSURANCE COMPANIES AND PENSION FUNDS, AND INDIVIDUAL SAVERS WHO TRADITIONALLY INVEST IN LONG-TERM SAFE ASSETS, ARE FACING CHALLENGES EARNING REASONABLE RETURNS, AND SO THEY MAY REACH FOR YIELD BY TAKING ON MORE RISK AND REALLOCATING RESOURCES TO EARN HIGHER RETURNS. THE PUSH TOWARD INCREASED RISK-TAKING IS THE INTENTION OF SUCH POLICY, BUT THE LONGER-TERM CONSEQUENCES ARE NOT WELL UNDERSTOOD.
Is the current stock market ebullience that sees US stocks just 5% below all time lows sustainable? Who knows – the economics of the US, Europe and Japan suggest it may not be. But then central banks aren’t going to give up until they get the economies of the US, Europe and beyond moving forward again with positive and sustainable growth and crucially with improved employment outlooks.
From a trading and investing perspective it is important to note that central banks will continue to man the monetary spigot but equally to note that each of the past few years has started off with hope and glory only to hit a mid year hiccup.
So while positivity is the new black the market and sentiment will continue to ebb and flow so we remain nimble and trade the market in front of us – not the rhetoric.