"A Recipe for Volatility": Why BofA Sees Risks in Market Calm

Over the past three weeks, investors have withdrawn $14.2 billion from U.S. equity funds—the largest outflow since January, according to data from EPFR Global cited by Bloomberg. Bank of America strategists believe this outflow sets the stage for increased volatility.

Global capital inflows are also slowing: global equity funds are currently attracting an average of $7 billion per week, compared with $52 billion in July.

Uncertainty surrounding the Fed’s monetary policy and the U.S. midterm elections, a new escalation of the war with Iran, as well as concerns about businesses’ massive spending on artificial intelligence, are prompting some investors to adopt a wait-and-see approach, Bloomberg explains.

At the same time, there are no signs of panic, BofA notes. U.S. Treasury yields have reached multi-year highs, but neither the markets nor the authorities are showing any particular concern so far, the strategists point out.

Despite mounting inflationary risks—with Brent crude trading above $100 per barrel and diesel prices rising to record highs—the Fed has so far maintained a cautious approach.

“Markets stop panicking when the authorities start to panic, but there’s no panic anywhere, despite the highest yields on 30-year bonds since June 2007 and a sharp rise in commodity prices,” BofA strategists noted. They called the combination of “market confidence” and “braggadocious policy” a “recipe for volatility.”

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