Investors dump risky assets as trade war flares

Investors pulled tens of billions of dollars from equities and risky corporate debt over the past week, according to new data that reveals the extent of the flight to safety in the wake of the escalation of the US-China trade war and concerns about global growth.

Equity mutual funds and exchange traded funds across the world suffered $24.5bn in outflows for the week ending Wednesday, the worst seven-day stretch of the year, led by a $15.2bn outflow from US stock funds, EPFR Global data showed. High-yield bond funds shed $3.9bn, their largest weekly outflow since December.

The data cover the first full week since the Federal Reserve cut US interest rates by 25 basis points and disappointed investors by not strongly signalling further monetary easing. Also early in the period, US President Donald Trump promised new tariffs on China and Beijing allowed the Chinese currency to weaken in response.

The resulting concerns about the effect on global growth spilled over into a sell-off of risk assets on Monday, when US stocks lost 3 per cent of their value, their worst daily drop of the year.

“Investors are jittery,” said Nela Richardson, investment strategist for Edward Jones. “China is slowing, the US is slowing, Europe is slowing . . . these outflows are not just about this week, they’re about the late stages of the cycle.”

Investors preferred safer assets such as government debt and money market funds. They poured $102bn into money market funds globally last week, the highest weekly total since December and the second highest since EPFR Global began tracking them in 2007.

The move into ultra-safe corners of the market sent the yield on the 10-year US Treasury note down to 1.7 per cent after weeks hovering around the 2 per cent mark. The spread between the yield on junk bonds and risk-free Treasuries soared 34 basis points to 4.5 per cent.

Fraser Lundie, co-head of credit at Hermes Investment Management, said widening high-yield bond spreads reflected the souring macroeconomic outlook and the risk it poses to highly indebted companies.

“There are a lot of companies at the lower-end of the high-yield market in which no amount of monetary stimulus will be enough to help them at this point,” Mr Lundie said. “Having so many years of covenant-lite issuance means that recovery rates in the event of default are going to be materially lower than in previous cycles.”

Fears over growth intensified this week when German industrial output data fell short of expectations, while Mr Trump on Monday labelled China a “currency manipulator” after the renminbi dropped below a long-protected threshold of 7 per dollar. Meanwhile, the Trump administration has been keeping up its campaign for more rate cuts from the Fed, which the president said has not eased policy enough.

“The market is pricing in too many rate cuts this year and too much optimism about what those rate cuts will achieve,” said Ms Richardson. “We still think there’s growth to be had in the stock market, investors just have to stomach the volatility.”

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