“Recessionary.”
That’s the word BofA’s Michael Hartnett used to describe a somewhat inauspicious juxtaposition in the latest weekly flows data.
Global equities took in just $2.2 billion over the reporting period, by far the slowest week of 2022 (figure below).
That’s notable. Recall that despite (and perhaps because of) the ongoing swoon in risk assets, money continued to pour into stocks after the calendar flipped, leaving inflows ahead of 2021’s blockbuster pace. Until this week, anyway.
Warning signs were also evident in investment grade credit, which saw the biggest outflow in 13 months. The cumulative outflow from IG, high yield and emerging market debt was the largest since April of 2020 (figure on the right, below).
Meanwhile, Treasurys took in the most since the chaotic days in and around the initial panic (figure on the left, above). TIPS have seen huge redemptions over the past several weeks.
Although it’d still be a stretch to say credit is truly “cracking,” accelerating outflows certainly merit attention. Lipper data showed $3.55 billion fled junk funds over the week, while $2.54 billion left IG.
It was the second-largest combined weekly outflow since the onset of the pandemic. The black line in the figure (above) shows net credit flows have turned decisively cautious.
Summing up, Hartnett reiterated a familiar set of talking points. Over the next six months, the “rates shock morphs into a recession shock,” he said, noting that IG spreads are now the widest since November 2020.
“Credit weakness in cyclical sectors is feeding into stocks,” he warned, adding that this week’s flows bring the YTD redemption from corporate bonds to $54 billion, a rather stark reversal compared to this time last year, when corporate credit funds were still raking in cash.
“Recession risks are rising,” Hartnett said flatly. “We remain bearish tech, stocks and credit, and long vol, cash and defensive assets.”
