Record inflows to US-listed ETFs; US payrolls may catch bond markets off guard

June was a record breaking month for US-listed ETFs. The bond market seems too confident of a July cut.
Joanne Goh, Eugene Leow03 Jul 2019
    Photo credit: AFP Photo

    Equities: US-listed ETF flows skyrocket in June

    June was a record breaking month for US-listed ETFs. Inflows for the year amounted to USD63bn in June, just short of the all-time high of USD68bn recorded in January 2018. While May saw the largest asset bleed for the year amounting to USD$11.7bn on renewed China-US trade tensions, its ill effects were well negated in June by substantial inflows into US equity and fixed income ETFs of USD34bn and USD24.7bn respectively. The rally in both stocks (record high S&P500) and bonds (10Y yields below 2%) were clearly driven by inflows fueled by increased bets for a Fed rate cut in July.

    Commodity ETFs were favoured in June after which four consecutive months of outflows; June inflows totalled USD3.0bn and brought 1H19 inflows into the black with a USD172mn. Gold displaced the USD as a safe-haven from increased Fed cut expectations. Gold Spot XAU trading at +USD1,430 in June, its highest price level in more than six years. On the other hand, sentiment was mixed in the oil market in June, caught between US-Iran tensions and weak demand and supply cuts in crude oil. Entering into July, demand worries appeared to have the upper hand in in pushing crude prices lower again after its brief rally in the second half of June. 

    Rates: The market is too confident of weak payrolls  
    While there are good reasons why US Treasuries should continue to rally, we think that the market may be too confident that a July Fed cut is a done deal. With the China-US trade truce announced over the weekend, it can be reasonably assumed that the urgency for a July cut has diminished somewhat. However, pricing has barely budged, with the market looking at a 100% chance of a move this month (about 80% for a 25bps cut and 20% for a 50bps cut). With the market heavily positioned on the dovish side, rates are vulnerable to a selloff if labour market data surprises on the strong side.

    ADP employment (due Wednesday) and nonfarm payrolls (due Friday) were abysmal in May and consensus is looking for a bounce back into the 140-170k range. Given how volatile payrolls can be, we think that short-term USD rates may be too complacent heading into the coming few trading days. Meanwhile, 10Y US yields nudged to a new low for the year (1.96%) as global yield scarcity bites. US bonds still offer a sizable yield pickup over peers. As the European Central Bank (ECB) gears up for further easing, DM yields will likely be anchored for the foreseeable future. We see downside risks to our G3 yield forecasts.     

    Joanne Goh

    Regional Equity Strategist

    Eugene Leow

    Rates Strategist - G3 & Asia

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