In his latest flow show report, BofA's Michael Hartnett finds that while inflows into markets in the past week continued, with $3.1bn going into stocks - of which $13.7bn went into ETFs, and $10.6bn was redeemed from active managers, $1.2bn into bond and $0.3bn into gold (unfortunately EPFR doesn't track inflows into bitcoin yet), although he noticed something peculiar: the “yield” trade appears to be fading, with the smallest IG inflows in 50 weeks ($1.4bn), while the revulsion to junk continued after the 6th consecutive week of HY outflows.
Furthermore, the "growth" trade is reversing: BofA spots a big (7th largest ever) redemption from US equity growth funds, as inflows to tech funds waning; coincides with bout of weakness in tech (e.g. EMQQ -11%, SOX -10% in 10 trading days)
Not everything has changed though, and EM debt saw the largest inflows in 26 weeks ($2.2bn), although Hartnett does note that EM debt & equities have been struggling in recent weeks despite the inflows.
So do these flows indicate the end of the conventional "rotation?" There is just one thing that will determine the answer: wages, because according to Hartnett "Rotation needs wages." Indeed, the most popular, "risk-parity" trade right now is “growth” in equities, “yield” in bonds associated with QE-leadership: This trade ends when “end of QE + start of fiscal stimulus + start of inflation = higher bond yields”; There is just one missing piece of evidence which is inflation:
"US tax reform needs wage growth to cause higher yields & sustained rotation to QE-losers; wage data critical in coming months"
It won't get with today's jobs report however, which despite a strong headline print, missed on hourly earnings.
Still, despite the continued big inflows into equities and bonds, perhaps this is not the right time to allocate capital. In a second observation, Hartnett notes that "Big Inflows can equal Poor Returns"
Record inflows 2017 into bonds ($347bn), stocks ($286bn); but years of big equity inflows (2010/13/14) were followed by poor returns (2011/14/15 – see Table 1); this especially case when BofAML Bull & Bear high (currently 6.4); we believe upside for risk assets in Q4/Q1 big but both credit & stocks peak early-18)
But Hartnett's most interesting observation had nothing to do with capital flows, and everything to do with inflation risk in the one economy, which as both we, and Albert Edwards believe, will be the cause of the next global collapse: China.
Here the only number that may matter is 4%, as in the yield on the 1Y bond (or 10Y for that matter since China's yield curve is largely inverted). Or, as Hartnett puts it, crashes need China:
Crashes need China: China bond yields rising in response to PBoC tightening (EM reflects this); but higher China yields (Chart 1) precursor to asset inflection point not big global growth surge & G7 bond crash
Which assets are likely to be impacted the most once this Chinese bubble pops? Two suggestions according to BofA are cryptos and/or emerging markets...