Investors funnelled money into equities and other risk assets in the lead-up to the Federal Reserve’s meeting on monetary policy on Wednesday, when the central bank cut US interest rates.
Mutual funds and exchange traded funds that invest in US equities had inflows of $20.7bn for the week ended September 18, the most in six months, according to data from EPFR Global. Funds investing in emerging market equities had their first inflows in five months. More than $3bn flocked to US high-yield bond funds.
The figures underscore the sharp turnround in sentiment from last month when investors hunkered down in safe assets such as government debt. Funds holding US government bonds saw $3.5bn of outflows in the week, on top of $5.6bn the previous week.
The Fed’s much-anticipated quarter-point reduction of the fed funds rate target range, its second consecutive cut, brought US monetary policy to a more appropriate level, said Todd Jablonski, the chief investment officer at Principal Portfolio Strategies.
Rate rises last year “effectively put our monetary policy at a level of tightness that was unsuited for the angst and concern of a global trade war”, Mr Jablonski said.
With other central banks, including the European Central Bank, also easing policy, Mr Jablonski said investors have confidence that financial conditions are set to remain easy and liquidity ample, which serves as a boon for risk assets.
Jay Powell, Fed chairman, did reiterate this week’s cut was “insurance” against slowing growth globally and elevated trade uncertainty, but investors appeared to accept the more hawkish tone of the meeting, given Mr Powell’s emphasis that the economy remains on a firm footing.
“The best thing for risk assets is the data,” said Jim Paulsen, chief investment strategist for the Leuthold Group. “At the end of the day as an investor, would you rather have a rate cut because the data is weak or have the Fed say it is not going to raise rates because the data is getting better?”
Still, the Fed and its willingness to ease has played a large role in bolstering risk assets, according to Kathy Jones, the chief fixed-income strategist at Charles Schwab, and the scope to disappoint still remained high, she added.
Markets are pricing in at least one more interest rate cut from the Fed this year, while fewer than half of the participants on the policy-setting Federal Open Market Committee view that as the most likely outcome. Moreover, two members voted against this week’s cut.
“It gets harder and harder to get the next cut if you already have two people dissenting,” Ms Jones warned. “People are complacent that rates will stay low and the Fed will continue to provide accommodation.”