LA Private

Cash becoming king as US Government stash dries up

As the US debt ceiling talks drag on towards the June 1 We’re out of money! deadline set by the American Treasury, big global investors are cashing up – which is not unexpected.

Late in the week markets became optimistic that a deal is imminent, but no one should put their trust in any deal involving the Republicans (slim) majority in the US House of Representatives, which is full of Trump supporters and others hell bent on being disruptive, even if it triggers a default.

For that reason, the caution big investors have shown in the latest Bank of America investor survey is understandable, coming on top of a rising belief in slower growth, and tightening credit conditions.

Nor is it hard to understand why “big investors raised cash balances and turned more pessimistic on growth” in early May.

Cash and US Treasuries are the havens of choice – even though, paradoxically, a failure of the debt ceiling talks between President Biden and the House of Representatives Republicans would see those bonds in possible default.

But equities are not being avoided as well, especially in Europe and China (even though the China re-opening boom story has died as the data has disappointed).

That’s clearly a sign of investors trying to limit their direct exposure to US dollars – although a default would not miss any one in the initial tidal wave

BofA said cash levels climbed to 5.6%, equity exposure hit the highest levels of 2023, and bond allocations rose to levels not seen since 2009.

The mood of global fund managers hit the most pessimistic levels so far this year, with 65% of respondents projecting a weaker economy, the survey said.

But despite the worries, many respondents still hope for a “soft landing” this year.

Nearly 2 out of 3 fund managers surveyed expect to see a weaker economy going forward. 63% still say the US economy will have a soft landing while 27% opted for a hard landing scenario.

“Fading optimism for a strong China rebound (net 55% expect stronger Chinese economy, down 28 percentage points month-on-month) driving allocation to Emerging Market equities down (a net 24% overweight and the least overweight position since late 2022),” the bank’s strategists added.

With the June 1 deadline nearing, those expecting a debt ceiling resolution dropped from 80% to 71%, the survey showed.

Many stock investors turned to technology in a “flight to safety,” with the sector seeing the highest two-month activity since the global financial crisis.

Right now, the long tech trade is the most crowded, BofA pointed out.

That helps explain the outperformance of big techs life Netflix, Meta (Facebook) Apple, Alphabet, Amazon, Microsoft.

BofA said the allocation to stocks is at a 5-month high, highlighted by that “big” rotation out of commodities into the tech (the highest in 17 months) and Eurozone equities.

Hartnett also noted that investors are most long growth (techs) vs value stocks since July 2020.

Other overcrowded trades include shorting US banks, the US dollar and going long in European and China equities long, and long US Treasury-bills (which is a safe-haven strategy with the debt ceiling in mind).

BofA’s polled nearly 290 investors for the May survey with more than $US750 billion under management between May 5-11.

On the Fed front, 61% of respondents told the BofA that the hiking cycle is over with the consensus saying the Fed will start cutting in January, 2024.

Commercial real estate is still seen as the most likely source of a credit event, while 71% of the respondents expect a resolution to the debt ceiling before the US runs out of money to pay its obligations.