‘Doomsday Cash’ And The $4.49 Trillion Question

Global equities took in another $3.3 billion over the latest weekly reporting period.

It was the second-smallest weekly inflow of 2021.

Even as the pace slows, the uninterrupted streak is remarkable. The total YTD haul for global equities now sits at $613 billion (figure below). That’s more than the total new spending allocated in the bipartisan infrastructure bill being hashed out on Capitol Hill.

The breakdown was predictable. “The flows continue to chase performance themes,” Nomura’s Charlie McElligott said, citing a $2.6 billion outflow from US stocks, which suffered a three-day swoon culminating in Monday’s dramatics.

BofA’s Michael Hartnett described a five-week outflow from “reflation trades” (as a cohort, apparently). Energy, materials, industrials and financials all saw outflows over the latest one-week period.

The figures (below, from BofA) tell the story vis-à-vis flows chasing thematic shifts.

Tech enjoyed a fourth straight week of inflows as the bond rally and attendant bull flattening steamrolled reflation expressions, on the way to creating a “growth scare” optic, which Beijing inadvertently “validated” by way of an RRR cut. Delta variant headlines and the perception of a nascent Fed policy mistake served to cement the narrative.

Still, BofA’s Hartnett noted that, since the election, every $100 in inflows to value was met with just $18 in outflows. The figures for small-caps, financials and materials are $17 and $10. He then summed up the evolution the macro narrative since Biden was elected and the Pfizer readout confirmed the existence of a highly efficacious vaccine (Hartnett’s pen writes in equations, which aren’t always easy to parse, but the following quote, from the latest edition of the bank’s weekly “Flow Show” series, is fairly straightforward):

‘Reopening rally’ kick-started Nov 3 by election/vaccine = stocks/credit up big, yield curve steepens & weaker US$, cyclicals>defensives; “inflation boom” kick-started Feb 16 by blowout Jan US retail sales = commodities up big, yields surge, long-duration tech cracks, value>growth; “peak growth/policy” kick-started June 16 by hawkish FOMC (+ China ease) = yield curve collapse, bonds>stocks/commodities, dollar up, growth defensives>value cyclicals.

That’s where we are. “Where to now?” is the million-dollar question.

In some ways, it’s the $4.49 trillion dollar question. That’s how much “dry powder” is still sitting mostly idle in money market funds, on ICI’s data (figure below). Last week marked the first inflow since the week of June 2.

“Fund flows have been an eye-watering part of the story YTD, with so much ‘doomsday cash’ stockpiled around the pandemic getting deployed into all things ‘financial asset’ ever since,” McElligott said Friday.

But, again, flows chase performance. And despite the proximity of all-time highs on the benchmarks, recent stumbles (including Monday’s nauseating, backward somersault) could mean the pace of equity inflows continues to decelerate (figure below).

The four-week average is now below $10 billion for the first time in 2021.

Thankfully, there’s always buybacks.