During the week leading up to Wednesday, U.S. large cap stocks saw a significant outflow of funds, marking the most substantial withdrawal since December 2022, as reported by Bank of America. This trend was evident in the data from EPFR, indicating that U.S. large caps experienced outflows amounting to $15.8 billion, contributing to a broader outflow from the stock market totaling $19.6 billion.
The week was characterized by notable events that impacted investor sentiment. Firstly, Wall Street witnessed a decline triggered by hawkish comments from Federal Reserve officials and the surge in oil prices, which breached the $90 per barrel mark. Additionally, a selloff occurred on Wednesday following the release of U.S. inflation data, which exceeded expectations. These developments prompted market participants to revise their expectations regarding a Federal Reserve rate cut, pushing it back from the previously anticipated timeline in June to September, although market pricing remained volatile. This adjustment had implications not only for the Federal Reserve but also for central banks globally, including those in Europe.
In a noteworthy development, Japanese stocks also experienced their first weekly outflow in over three months. Despite these outflows, major equity markets in the United States, Japan, and Europe continued to hover around record highs, indicating ongoing investor confidence despite the recent fluctuations.
In a broader context, Bank of America observed a prevailing sentiment favoring “Anything But Bonds,” with investors seeking alternatives to traditional fixed-income securities. This sentiment has fueled demand for inflation hedges such as gold, which has also been trading near record highs. Additionally, there is a notable trend of investors favoring ‘monopolistic cash flows,’ leading to increased investment flows into large U.S. tech stocks.
Bank of America’s analysis further indicated that the 10-year annualized return of U.S. Treasuries is currently at its lowest point in 65 years, signaling the end of a prolonged trend of bond market strength. Looking ahead, the bank’s outlook suggests that various factors, including geopolitical tensions, fiscal policies, energy scarcity, and labor constraints, are likely to contribute to higher inflation and a higher cost of capital until a recession triggers a shift in investor sentiment towards bond investments.
Reflecting the sensitivity of interest rate expectations, U.S. 2-year Treasury yields have surged to near five-month highs, having risen almost 70 basis points since the beginning of the year. Similarly, ten-year Treasury yields have seen an increase of approximately 79 basis points year-to-date, underscoring the impact of changing market dynamics on fixed-income securities.