Quarter-end rebalancing adds to market woes

How much of market anxiety is due to flows?


JPMorgan estimates that balanced mutual funds need to sell $136 billion of equities to buy bonds to meet allocations. The rout in fixed income along with a strong quarter from equities is leading to significant dislocations.

The overall tally is much larger.

Estimates from Bank of America say US private pensions alone will need to shift $88 billion from equities into bonds. Sovereign wealth funds will be reallocating upwards of $100 billion. The peak of rebalancing is usually around the 25th of the month, which is today.

The quarter ends next Wednesday and there has been no let-up in the sour mood in markets. US equity futures are bleeding lower now after an earlier gain. There are also signs of waning retail enthusiasm.

In the bigger picture, fundamentals are still good. The reopening is continuing and even the countries experiencing a third wave appear to be coping better. Besides, the market hasn’t cared about covid for six months, why should that suddenly change?

I’m weary of the head-and-shoulders patterns in AUD/USD and the Hang Seng, both as warnings on global growth. At the same time, there’s a good argument to weather the storm until April, which is historically the best month for equities.

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