iFlow > Investor Trends
Appearing every Wednesday, Investor Trends provides a deep dive into patterns and behaviors in equity, bond and currency markets around the globe, underpinned with deeper macro insights.
Geoff Yu
Time to Read: 5 minutes
EXHIBIT #1: WEEKLY SMOOTHED FLOW INTO CHF, SGD AND JPY COMBINED
Source: BNY, Bloomberg
Our take
After nearly two weeks of risk-off in FX markets, iFlow Carry has moved out of statistically significant negative territory. While risk appetite is clearly shaky and we do not expect a strict “carry-on” environment, our “havens” basket of the Swiss franc (CHF), Japanese yen (JPY) and Singapore dollar (SGD) is now approaching its most-sold level on a weekly average basis this year, matching the risk-recovery flow in early May as post-Liberation Day sell-off gradually eased. Furthermore, these three currencies are currently among the worst performers in iFlow, with very high-flow magnitudes. Beyond the shift in risk sentiment, idiosyncratic factors are starting to weigh on the market, which remains short of clear FX safety candidates
Forward look
For example, the JPY faced heavy month-end sales even though we expected positive rebalancing. The Federal Reserve’s stance on U.S. rates limited yen demand, but markets remain very skeptical of the new government’s fiscal and monetary policy preferences, resulting in weak demand since late September. The Finance Minister’s verbal intervention on the yen’s performance has had limited impact so far, and we expect markets to wait for fiscal plans before adjusting current holdings.
Meanwhile, the CHF and SGD face their own policy challenges. While the recent decisions by the Swiss National Bank (SNB) and Monetary Authority of Singapore (MAS) opted for stability despite global growth and trade challenges, there are signs of more limited tolerance for heavy savings levels that continue to push for appreciation, especially if peers are pursuing easing. The franc is more at risk in this regard, and after the recent round of recovery flow, we see a clear pullback. We do not expect markets to return to significant positive carry for the remainder of the year, so underlying demand due to comfortable surpluses should persist. However, idiosyncratic factors still need to be addressed for low-yielders. In the meantime, markets may continue to stick with the U.S. dollar if uncertainty over risk performance returns toward year-end.
EXHIBIT #2: BRAZIL EQUITY HOLDINGS VS. CORE SECTORS IN EM LATIN AMERICA
Source: BNY, Bloomberg
Our take
In comments made on Tuesday, Brazilian Finance Minister Fernando Haddad emulated his British counterpart Rachel Reeves in calling rates “very restrictive” and attributed rising public debt to high headline-rate levels set by the central bank. Unlike in the U.K., such pressures on Brazil’s Monetary Policy Committee (COPOM) are not considered new, and we doubt that the Selic rate decision later today will be influenced by his comments. On the positive side, Brazil remains one of the best-held markets in iFlow across all asset classes. Since iFlow Carry has moved out of statistically significant negative territory, carry-seeking flows, whether through currency or duration, can resume or at least avoid selling pressure. We also highlight that Brazilian equities are now performing strongly: The market is the best-performer globally on a one-week and one-month basis. Even if a holding pattern prevails for the Brazilian Real (BRL) and Brazilian debt, some form of easing in financial conditions can arise from equity performance.
Forward look
The distribution of flows on a sectoral basis for Brazil does point to some need for caution. Like peers globally, equity market performance has been unusually concentrated this year, which leads individual indices prone to sharp adjustments based on a limited number of companies. AI and capital expenditures are key themes in the U.S., while in Europe, defense continues to dominate performance. In APAC, including China, equity performance is also contingent on technology. Recently, with higher gold prices and an emerging race for rare earths (of which Brazil can be a significant supplier), global mining stocks have also started performing strongly. Exhibit #2 shows that in EM Americas, metals and mining (GICS level 3) recently saw holdings gain 35% above the rolling one-year average. Brazil’s significant mineral resources can benefit from global investment, but dependency on one sector is not enough, and there are other pressure points in the country’s terms of trade. For example, the Sino-U.S. trade détente may generate some demand weakness for Brazilian food exporters in the near term. Despite being a key export for Brazil, listed food companies are out of favor and holdings are currently nearly 30% below the one-year average. Brazil’s equity performance is to be celebrated, but concentration risk needs to be considered.
EXHIBIT #3: TOTAL AND CROSS-BORDER HOLDINGS OF U.K. GILTS, ABSOLUTE AND RELATIVE
Source: BNY, Macrobond
Our take
Chancellor of the Exchequer Rachel Reeves’ surprise speech on Tuesday has all but confirmed that significant tax rises are coming for the month-end budget. The U.K. government is keen to avoid fresh borrowing for fear of a repeat of an adverse reaction in gilt markets, and our data indicate that there isn’t much “headroom” for holdings either in the market demand for U.K. paper. After a strong Q2 rally on the back of diversification away from U.S. Treasurys, gilt holdings rose to nearly 10% above the one-year rolling average, but performance has been poor since. Current aggregate holdings are now back down to 5% above the rolling one-year average. The only encouraging sign for now is that overseas investors have returned after heavy liquidation in Q2, during which international holdings of gilts (notional terms) fell below the rolling one-year average for the only time this year. Currently, cross-border ownership is slightly stronger compared to the domestic community, and the gap is minimal. In absolute terms both groups appear in a holding pattern ahead of the Nov. 26 announcement.
Forward look
The lack of fresh figures this week has limited scope for additional gilt inflows, and long-dated bonds swiftly gave up any initial gains in the wake of the speech. However, the Chancellor’s comment that Bank of England (BoE) base rates are too restrictive for corporate borrowing was a surprise and, in extremis, could be seen as interference. Her mention of high levels of debt servicing costs also implied that rates need to fall. Earlier BoE rate cuts could certainly help offset at the margins. Some Monetary Policy Committee members favor easing this week due to economic factors, but our base case remains for an on-hold decision. Currently, we do not see a majority in favor of easing, and a surprise move on Thursday could be interpreted as a response to the Chancellor’s speech. While offering some short-term relief, concerns over institutional factors surrounding the BoE could have adverse effects over the medium term.
