As we know, the unwinding of the yen carry trade and the weak US jobs report for July triggered a two-day panic attack at the start of this month that has vanished as quickly as it came. But it and its immediate aftermath coincided with Bank of America’s usual monthly survey of global fund managers and their current investment positions. Unsurprisingly, cash featured more heavily than in the immediate past.
The two days saw investors increase their cash allocations and reduce their overweight position in stocks in early August, as expectations for global growth dropped to their lowest in eight months. According to the survey, 31% of respondents said they were overweight in stocks in August, down from a high of 51% in July. Equities allocations fell to net 11% overweight from net 33% overweight, the lowest allocation since January 2024 and the biggest month-on-month drop since September 2022.
Investors injected more cash at the start of the month, with their average cash level reaching 4.3% of assets under management, up from 4.1% a month before. However, this level was still well below the 5% plus readings seen in late 2023.
Despite the hype and headlines among many analysts and investors, the briefness of the crunch and its disappearance were insufficient to drive a larger move into cash. And since Wall Street has regained all lost ground from the sell-off, one might reasonably ask why panic selling occurred, as many investors sat tight, avoided large transactions, and saved on costs.
BofA attributed the shift to weak US payrolls data for July and the volatility shock associated with the Japanese yen’s rebound. However, the survey preceded this week’s positive producer and consumer price survey results, which seem to have convinced everyone that the Fed will cut rates next month (although the end-of-month PCE data, followed by the August PPI and CPI, must be considered before the Fed meeting).
Shares around the world have been rebounding in recent sessions. BofA said 189 participants with $US508 billion of assets under management responded to the survey, and a net 47% of respondents expect a weaker global economy in the next 12 months, down 20 percentage points from July.
However, 76% of respondents to the survey still expect a “soft landing” for the global economy, referring to a gradual slowdown rather than a more dramatic “hard landing” or a “no landing” scenario. BofA attributed this high level of conviction to “expectations for lower interest rates,” as 93% of respondents expect short-term rates to be lower in 12 months’ time, the highest in the past 24 years.
Therefore, the underlying driver of this survey seems to be a very strong belief that the next year will be dominated by rate cuts rather than rate hikes. And the July retail sales data, with its strong 1% rise, indicates the US economy is performing well. If this continues, the Fed might be limited to one rate cut for a while.