BAML: The crazy week of political news is triggering 'monster' moves in markets
The specter of political risk prompted investor flows into bonds at the fastest pace in over two years.
The specter of political risk prompted investor flows into bonds at the fastest pace in over two years, according to Bank of America Merrill Lynch.
The bank's clients this week triggered a $16 billion inflow into bonds, BAML said in a note on Friday. At the same time, $800 million flowed into gold, another asset that is favored when investors want to pare risk, in anticipation of the uncertainties surrounding all the political events.
It was a "monster week of inflows" into investment grade and high-yield bonds, with $11 billion pouring in, BAML said.
Also this week, flows into financial stocks slowed, though not by enough to reverse the bets that Wall Street has placed on banks, BAML said, in anticipation of deregulation and higher interest rates. While Comey's testimony got most of the attention Thursday, the House passed a bill designed to roll back some of the strongestWall Street rulesfrom the financial crisis.
A sense of déjà vu
Investors' cautious move into bonds has not yet been followed by a volatile and widespread market reaction to the political events that are being hedged.
Besides the 2.5% plunge in the British pound, global markets were relatively calm after the UK election ended with exit polls showing no clear winner. The pound stabilized overnight against the dollar as Prime Minister Theresa May, whose Conservative Party lost its majority in Parliament, confirmed that she would seek to form anew minority governmentincluding an informal alliance with Northern Ireland's Democratic Unionist Party. May had called the election hoping to boost her Parliament majority.
Treasurys were in fact lower Friday, with the benchmark 10-year bond yield up by 1 basis point, at 2.211% at about 8:49 a.m. ET. US stock futures were green.
After markets absorbed Brexit and US President Donald Trump's election, the UK vote provided a "sense of déjà vu," said Lucy O'Carroll, the chief economist at Aberdeen Asset Management.
"That said, we could see a fair amount of volatility in the coming days and weeks unless Westminster’s response to this surprise result is remarkably smooth, which is unlikely," O'Carroll added in a note.
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