Investors Flock to Equities Amid Fed Rate Cut Expectations

182

In the week leading up to Wednesday, equity inflows surged across most regions, with emerging markets and the U.S. leading the charge, according to Bank of America Global Research. This influx of investments comes as investors anticipate potential rate cuts from the Federal Reserve due to softer economic data.

Record Inflows

Bank of America reported $22.2 billion in equity inflows over the past week. Emerging markets attracted $11.1 billion, the largest weekly figure since February, while the U.S. saw $7.9 billion in inflows.

These inflows, tracked by EPFR, occurred despite global equity markets facing pressure from disappointing earnings reports and ongoing political and economic uncertainties. The S&P 500 has dropped nearly 2% since Monday, while major benchmarks in Asia have also seen declines. European markets have fared better, with the pan-European STOXX 600 index remaining broadly unchanged for the week.

Market Dynamics

The BofA data did not account for Thursday’s market decline, but analysts have noted that the selloff was driven by stretched positioning, as indicated by the flow data. When many investors hold overweight positions in an asset, the potential for further allocation increases diminishes, leaving room for reductions.

Despite the recent market volatility, there are signs of stabilization, offering hope to stockholders. “Bulls say correction healthy as big levels holding,” remarked BofA investment strategist Michael Hartnett.

Bond and Gold Inflows

Bond funds saw significant interest, with $16.1 billion in inflows. Gold funds also experienced a boost, with $1.3 billion in inflows, marking their largest two-week inflow since March 2022.

Conversely, there were $42.3 billion in cash outflows, the largest in three months. Traders are betting on rate cuts from the Federal Reserve, which would typically result in lower yields on short-dated government bonds held by cash-equivalent money market funds.

Rate Cut Speculations

Futures markets are now fully pricing in a rate cut at the Fed’s September meeting. This is due to indications that inflation is moving back towards target levels, coupled with signs of slowing economic growth and a loosening labor market.

BofA’s bull & bear indicator, a measure of market sentiment, jumped to 6.9 from 6.5, reaching its highest level since May 2021.

UK Equities and Fixed Income

Barclays, citing the same EPFR data, noted that UK equities saw their first weekly inflow since November 2023. For the year, cumulative fixed income flows of $358 million overtook cash in the latest week, according to Barclays.

This surge in equity inflows reflects a complex interplay of economic indicators, market sentiment, and investor expectations, signaling a cautious optimism among market participants.