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QE "Barbell" Returns: Biggest Junk Bonds Inflow In 8 Months; Most Gold Buying In 7 Weeks

The cross asset whiplash events, coming at a furious pace unseen since 2009, continue, and while the late September surge driven by a historic short squeeze served to massively boost equities (because as DB's Jim Reid notes "markets have slowly come to terms with the fact that the 'great' global central bank liquidity story of '2008-20XX' is far from over"), other risk assets were also impacted. Case in point: junk bonds, which after becoming one of the most unloved asset classes in 2015 due to their exposure to energy assets, took advantage of the latest vicious squeeze in crude, and notched their biggest inflow in 8 months.

Here is the latest fund flows as summarized by BofA's Michael Hartnett

  • Junk-on: largest HY bond inflows in 8 months & largest EM debt inflows in 5 months (Chart 1)...collapse in Fed hike expectations gives oversold junk "yield" a bid.

  • Risk-on: equity & bond funds both record inflows for first time in 10 weeks...signals turn in risk-off sentiment...note BofAML Trading Rules remain in "buy" territory, bar the Breadth Rule which flipped from "buy" to "neutral" this week (Table 3 & Chart 4).

 

Paradoxically, it's not only risk on assets that are catching a bid. Just as importantly, "central-bank policy failure" inflows are also starting to move:

  • Gold-on: largest inflow in 7 weeks...reflects weaker US$ and QE "policy failure" hedging.

Some other flow takes:

  • EM-on: first EM equity inflows in 14 weeks...first signs of rotation to "weak US$" plays Europe-defiant: $3.1bn inflows (inflows in 20/22 weeks)...many clients using Eurozone as hedge against surprise EM-upside.
  • US cyclical-on: muted $0.7bn inflows belie divergence between $2.8bn ETF inflows & $2.0bn mutual fund outflows; ETF inflows all to macro-sensitive, cyclical themes e.g. QQQ, IWM, XLI, XLY...hints that growth expectations troughing.
  • Unhealthy: 4 straight weeks of global Health Care fund outflows (longest streak since Jan’13); by contrast, global Consumer funds see largest inflows in 3 months ($0.9bn).
  • GWIM resilient: BofAML private clients have added risk in each of the past 4 weeks (Chart 5); and note 2015 on course to be first year since 2012 that private clients have bought more common stocks than ETFs (Chart 6).

Still, what was until a few days ago a massive contrarian buy signal with nearly 100% of global equity markets trading below their 50 and 200 DMA, has been now fully rejected following this furious rally on more QE hopes:

Finally, how should one trade this "barbell", bipolar market? Here is BofA's conclusion:

Consensus is currently: low growth/low EPS/low rates here to stay, but no recession; trading ranges hold (SPX 1850-2050, GT30 2.8-3.2%, DXY 93-100); sell rallies into strength; own (sensible) growth, (safe) yield, (high) quality; rent EM/resources/commodities