Here’s How Money Moved This Week — ICYMI

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Money flowed into risk-assets in the past week, according to Bank of America Global Research, another sign in May that the market is positioning for a cyclical upturn soon. 

Here’s where global investors placed capital this week:

  • Cash: +$8.4 billion (that’s an inflow)
  • Treasury Bonds: -$900 million (that’s an outflow)
  • Investment Grade Bonds: +$12.8 billion
  • High Yield Bonds: +$6.9 billion 
  • U.S. Equities: +$2.2 billion
  • European Equities: -$200 million 
  • Bank Stocks: +$1.5 billion 

These are net flows. 

The Bank of America strategists said the inflows to cash, which have been shrinking weekly of late, were “tiny.” Investors are holding almost $5 trillion of cash, up more than 110% since early February, as the coronavirus put much of the globe into a recession. 

But recently, risk sentiment has been turning, especially as monetary and fiscal stimulus appear to have been working.  The U.S. money supply, which has expanded at an unprecedented 22% clip since the Federal Reserve announced quantitative easing according to Morgan Stanley’s strategists, has spurred huge volumes of loans recently. And a slowing read on weekly jobless claims -- 2.1 million people this week as opposed to 6 million a few weeks ago -- supports the U.S. market’s view that the economy has bottomed.

U.S. Bank stocks, along with an incrementally expanding yield curve outperformed the S&P 500 this week. The Invesco Bank KBW ETF  (KBWB) - Get Report rose more than 8% this week, while the S&P 500 rose 2.4%. Meanwhile, the 10-Year Treasury yield rose for most of the week, before ending flat after Federal Reserve Chairman Jerome Powell said Friday he doesn't expect stimulus to create inflation soon, but rather that he expects more deflation. 

The flows into credit show optimism as well. While the S&P 500 fell roughly 1.4% from its weekly high, credit didn’t falter. Shares of two widely cited credit ETFs, tickers  (LQD) - Get Report and  (HYG) - Get Report, held onto their gains the whole week and rose 0.64% and 1.54%, respectively. This is a positive indicator for the way investors perceive future earnings. Since mid-May, high yield credit spreads in the U.S. have fallen about 11 basis points to end this week. The spread above the 10-Year Treasury is now just above 6.5%. A normal spread in a healthy environment is between 4.5% and 5%, so the recent move signifies incremental optimism in the market, contrary to the tone of last two days of the week in stocks. 

Bank of America said the slight move out of European stocks was the smallest outflow in 6 weeks and the Euro Stoxx 600 did gain 3% on the week, partially on plans from the EU to induce a $2 trillion stimulus package for the bloc. Importantly, EU stocks have had a rougher go of it this year than U.S. stocks have. The Euro Stoxx 600 fell 34% from its 2020 high, mirroring the S&P 500, but while the S&P 500 has gained about 34% since the low, the Euro Stoxx 600 has only gained 30%. One headwind is that, while the U.S. has enjoyed both monetary and fiscal stimulus, the EU has a slower process on fiscal stimulus. The bloc has been working to finalize a $2 trillion spending package, but it the bloc needs votes from 27 nations, some of which do not want government debt to climb too far. The U.S.’ system is simpler, with one government and two parties. 

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