Nearly $50 billion flowed into global equity funds over the past four weeks, according to BofA’s analysis of EPFR data.
The latest weekly flows point to growing conviction in US shares, which were out of favor in January as investors bet on outperformance from European and emerging market equities. US funds took in almost $7 billion last week, the second straight weekly inflow. Despite the Nasdaq’s buoyant start to 2023, tech saw a 10th straight week of outflows. European and EM shares extended their respective inflow streaks, as did IG credit funds.
Needless to say, some of the optimism inherent in bullish bets on equities is down to expectations for an imminent pause in the Fed’s hiking cycle and a non-trivial chance of rate cuts commencing in the back half of 2023. The same (possibly misplaced) assumptions are behind inflows into credit and copious evidence of risk-taking in speculative corners of the US equity market.
Jerome Powell this week made the “mistake” of saying the disinflation process has begun, even as he cautioned that the Fed currently sees no evidence of cooling prices in the key non-housing services sector. Fed officials have given no indication they’re prepared to countenance the idea of rate cuts this year.
Most sell-side analysts you’ve heard of are cautious. Morgan Stanley’s Mike Wilson remains concerned about earnings, for example, and JPMorgan’s Marko Kolanovic has variously warned that a recession isn’t in the price.
BofA’s Michael Hartnett is likewise unconvinced that the proverbial coast is clear. “Fed futures say one last 25bps hike, then 200bps of cuts [but] we say the bear risk is still that H1 2023 disinflation proves ‘transitory’ and/or that H1’s ‘no landing’ flips to ‘hard landing’ in H2,” he cautioned. BofA’s pseudo-famous “Bull & Bear Indicator” now sits at a middling 4.2, around halfway between indicative “Buy” and the “Sell” signals.
In the bank’s view, it might be wise to fade S&P 4,200. The highs are likely before Valentine’s Day, Hartnett said.
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