Equities face risk-free hurdle to lure investors after cash dash
Without a systemic tail the March banking blow-up, some of the $500bn or so that went to ground in cash money market funds in recent weeks could seep back to wider markets.
As investors assess fallout of US regional bank failures and Credit Suisse’s demise in Europe, it seems likely credit conditions will tighten further as a result. But fear of systemic contagion seems wide of the mark. Most investors appear reluctant to assume another wider economic shock unfolds from here, and prefer to think the whole episode just hastens the end to US Federal Reserve tightening.
The IMF, for one, sees no deep US or global recession ahead even if everyone is now back to forensically scouring incoming data for fresh clues.
Systemic stress monitors compiled by the US government and European Central Bank (ECB) are back down at levels seen before the Silicon Valley Bank bust on March 8 or even lower. The ECB’s systemic risk indicator for the US, for instance, has returned to its lowest level in a year.
And so a big question is what happens to the more than $350bn that piled into US money market funds since the Silicon Valley Bank collapse, bringing year-to-date inflows there to more than $500bn.
Much of the money will just stay, thanks to the yawning gaps between nearly 5% on offer in relatively safe government bills and Fed reverse repos and less attractive deposit or savings rates at most banks.
This is what JPMorgan strategist Marko Kolanovic and team call the “the risk-free hurdle of 5%” that equities and longterm bonds have to overcome.
For market bears, this could remain a drain until the Fed pulls the plug on higher policy rates — sucking more bank deposits into money funds until banks start to match them, but then forcing banks to crimp lending further as their costs and recession risks rise.
The speed of the Fed response is key again — and yet another rate rise in May could exaggerate the problem. With the three-month to 10-year yield curve still inverted by about 160 basis points — the deepest inversion in 40 years — there’s little temptation to move out the bond curve. But on the assumption that recession is avoided — or even that the technical earnings recession of two successive negative quarters in the first quarter is now behind and priced in — there may be some rebalancing of the extreme money fund flows of March.
STRESSED MONEY
How much of that $350bn of March money fund inflows — all of which went to governmentinvested vehicles and brought total money fund assets to a record $5.3-trillion — was only stressed money that may return to asset markets once the systemic risks dissipate, becomes an important point.
Money fund inflows jumped by about $1.1-trillion in the first four months of 2020 as the pandemic shock unfolded — even as Fed policy rates were floored to zero. But more than a third of that left again from May to the end of that year — presumably seeing near-zero interest rates as dead money once recoveries unfolded.
The near $400bn that dashed for money funds after the Lehman Brothers collapse in late 2008 — despite credit fears in some of those funds — had completely retreated by early 2010.
But this time will be unlike those two episodes.
The relative interest rate attraction of bills and repos after the steepest Fed rate rises in 40 years should make this year’s flows far stickier, unless or until the Fed were to embark on some dramatic rate easing.
Monitoring the weekly investment shifts, Bank of America’s Michael Hartnett and team think cash will continue to outperform “until the Fed cuts aggressively and earnings per share estimates trough”.
And yet some institutional investment money may still rebalance if the banking quake is not in fact systemic and deep recession does not ensue.
Full-year 2023 S&P 500 earnings estimates tipped slightly negative this month for the first time, down from a consensus of about 10% a year ago. But 2024 profit growth forecasts have pushed above 12% as a result and have held there.
Bank of America’s own proprietary “Bull&Bear” indicator, which is based on high-frequency fund flows and speculative positioning, is equivocal — just marginally outside what it would consider a “buy” signal.
Either way, there’s now no shortage of savings in cash if or when the lights go green.