Global money market funds saw their largest weekly inflow in almost six months as investors exercised caution regarding the U.S. economy’s stability, fearing that additional rate cuts this year could indicate more significant economic issues.
According to LSEG Lipper data, investors purchased safer money market funds totaling approximately $98.32 billion, representing their biggest weekly net acquisition since April 3.
A recent consumer sentiment report raised alarms for investors regarding the labor market’s health, leading to concerns that the Federal Reserve’s unusual 50 basis point rate cut last week was a reaction to a pronounced economic downturn.
“Although the market anticipates a reduction of the substantial money market asset accumulation could provide an impetus as it moves back to riskier assets, the category has consistently attracted inflows,” remarked Thomas Poullaouec, Head of Multi-Asset Solutions APAC at T. Rowe Price.
“The onset of rate cuts might encourage some investors to re-enter the market, but with a gradual decrease already anticipated, it’s unlikely to exert a significant effect.”
The Q3 report indicates a rise of about 6% in global stocks and U.S. Treasuries, gold surged nearly 15%, while the yen appreciated by an impressive 11%. Conversely, oil prices fell by 17%, and central banks have implemented the most extensive interest rate reductions since the onset of the COVID-19 pandemic.
The turmoil began when the typically calm yen reacted dramatically to the prospect of increased Japanese rates, coinciding with signs of discomfort in U.S. economic data.
In just a matter of weeks, MSCI’s primary global equity index lost $6 trillion, experiencing one of the swiftest sell-offs in years, particularly affecting Big Tech. Traders shifted their outlook from contemplating one or two U.S. rate cuts this year to anticipating five or six.
“The most significant event in Q3 was the breakdown of the yen carry trade,” explained Kit Juckes of Societe Generale, referring to the strategy of borrowing at low rates in Japan to invest in higher-yielding assets elsewhere.
“This, along with initial signs of weak U.S. data, substantially altered the market dynamics.”
However, the potential for reduced borrowing costs worked wonders. By the close of August, global stocks had bounced back, and Chinese markets were poised for an impressive recovery.
As Beijing unleashed stimulus measures, including rate cuts and interventions aimed at the struggling property sector, Chinese stocks experienced their most robust week since 1996, while real estate shares surged by a third.
China’s generous measures have additionally fueled the largest quarterly rise in emerging market stocks and primary global volatility metrics since 2022.
“For a turnaround in the asset class, a Chinese recovery is crucial,” stated Claus Born, an emerging markets equity portfolio manager at Franklin Templeton. “China’s role is extremely vital.”
The LSEG data revealed that investors withdrew a net $10.43 billion from global equity funds during the week, marking the most significant weekly outflow since June 12.
While U.S. equity funds faced $22.43 billion in net sell-offs, investors actively purchased European and Asian equity funds, contributing $5.88 billion and $5.29 billion, respectively.
Global bond funds attracted investment for the 40th consecutive week, garnering a net $13.74 billion.
Dollar-denominated short-term government bond funds pulled in $3.21 billion, the highest amount in four weeks. Investors placed $1.68 billion into high-yield and $1.11 billion into Euro-denominated global bond funds, respectively.
For the seventh consecutive week, gold and other precious metal funds proved popular, securing $1.11 billion in net purchases. Meanwhile, energy funds saw $128 million in outflows, marking the second straight week of net sales.
Data from 29,559 emerging market funds indicated that investors exited equity funds for the sixteenth week in a row, totaling $261 million in net outflows. In contrast, bond funds attracted $1.22 billion, keeping the inflow streak alive for fourteen consecutive weeks.
