In the most recent week, US large cap stocks experienced their most significant withdrawal since December 2022, as reported by Bank of America. This trend reflects growing unease among investors, who are wary of persistent inflation potentially delaying interest rate cuts, with geopolitical tensions further exacerbating the market's cautious stance.
Last week saw a substantial $15.8 billion exit from US large caps, contributing to a total market outflow of $19.6 billion, according to Bank of America's analysis, which utilized EPFR data to gauge global market movements.
The period in question witnessed a notable downturn in Wall Street, triggered by stern comments from Federal Reserve officials and a rise in oil prices above $90 a barrel. This was compounded by a sell-off in stocks following unexpectedly high US inflation figures, leading to a shift in market expectations. Where a Federal Reserve rate cut was anticipated as soon as June, forecasts have now been adjusted to September, though these predictions remain subject to change. This adjustment has implications not only for the US but also for central banks across Europe.
For the first time in over three months, Japanese equities saw withdrawals. However, despite these outflows, equity markets in the US, Japan, and Europe are still performing strongly, with many near or at record highs.
Bank of America's report also highlighted a current market trend favoring investments in assets other than bonds, driven by the search for inflation protection. This has led to increased interest in gold, which is near all-time highs, and substantial investments in large US tech companies known for their 'monopolistic cash flows'.
Reflecting on the broader financial landscape, the report pointed out that the annualized return on US Treasuries over ten years is at its lowest in 65 years. This marks a significant shift from the long-standing bull market in bonds, setting the stage for a decade characterized by higher inflation and capital costs, only to be mitigated by a potential recession that could revive the bond market.
Currently, US 2-year Treasury yields, which are particularly sensitive to rate expectations, are at a five-month peak, having risen nearly 70 basis points this year. Similarly, ten-year Treasury yields have increased by approximately 79 basis points over the same period.
