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BofA Strategist: Risk-Off Sentiment to Continue Until US Dollar Peaks
Summary
Bank of America's Michael Hartnett warns that a risk-off market environment will likely persist until the U.S. dollar's rally ends, citing fund flow data that shows investors rotating into bonds and away from broad equity exposure.
The current risk-off sentiment gripping markets is unlikely to fade until the U.S. dollar reaches its peak, according to a Friday note from Bank of America strategist Michael Hartnett. The analysis points to a significant investor rotation into fixed income, driven by recent bond-market moves and tightening financial conditions.
Investors Pivot to Fixed Income
Fund flow data for the week ending Sept. 30 showed a clear shift in investor allocations, according to the BofA report, which cited EPFR Global data. Bond funds attracted a substantial $18.8 billion in new capital, while equities drew $15.8 billion.
Meanwhile, money-market funds experienced outflows of $118 billion, a move BofA largely attributes to typical quarter-end rebalancing. Specific areas of the bond market saw notable interest:
- Long-term government and corporate debt funds recorded their largest inflow since May 2025 at $7.4 billion.
- Municipal bonds posted a record weekly inflow of $4.2 billion.
Narrowing Equity Market Signals Caution
AdHartnett noted that tighter financial conditions are weighing on equity market breadth, a sign of underlying weakness. He pointed out that 400 stocks in the S&P 500 are trading below their 50-day moving averages, while 300 are below their 200-day averages.
This has created a bifurcated market, which Hartnett described as trading "long artificial intelligence" (referencing the tech-heavy Nasdaq 100) and "short artificial irrelevance" (referencing the broader, equal-weighted market). This suggests investors are concentrating bets in a few mega-cap names while shunning the majority of stocks.
A Look at Regional Equity Flows
While the headline number for global equities was positive, regional trends revealed a more cautious stance on the U.S. market. U.S. equity funds saw their second consecutive week of outflows, losing $2.7 billion.
Conversely, international markets attracted capital. Europe saw its biggest inflow since February ($1.3 billion), Japan posted its sixth straight week of inflows ($1.8 billion), and emerging market equity inflows resumed at $3.2 billion. By sector, technology funds attracted $3.3 billion, their largest inflow in five weeks.
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