The rate at which international investors allocate their money to U.S. assets surged in August, and there are signs that that dislocation remains a factor in global markets.
Granted, August was an unusually volatile month, but the sheer scale of the move into U.S. stocks and bonds will take time to reverse.
Overseas accounts bought $57.9 billion in long-term U.S. equity and debt at the peak of the flight to relatively safe havens, compared to $9.1 billion in July.
Counting derivatives and other short-term assets, foreign buying swelled to $89 billion — and consider that on this basis, these traders were net sellers of $52 billion in U.S. securities in July.
In the bond market alone, flows shifted from $16 billion in net sales to $88 billion in net purchases crowding into Treasury-backed assets like those owned by SHY (quote) and out of those owned by emerging debt funds like EMB (quote):
Analysts had been looking for net selling in the wake of the U.S. Treasury’s credit downgrade were completely mistaken here.
Instead, the dollar became an even better alternative to the euro or other currencies that have been suffering from their own increased risk profiles.
While the Japanese yen (FXJ, quote) and the Swiss franc (FXF, quote) offered ultimate safe haven status, their own governments dissuaded strong flows of capital to either currency.
In any event, this move will not unwind right away, and any increase in the global fear factor will only drag it out longer.
As a result, emerging markets currencies may well be going higher over the long haul, but in the short term are likely to remain under pressure.
And until we see money come back to the currencies, any move into emerging stocks looks transitory.