Magazine article Global Finance

Global Capital Flows

Magazine article Global Finance

Global Capital Flows

Article excerpt

In a world of growing financial integration, not only have global capital flows become increasingly important determinants of asset prices, they have also influenced government and central bank macroeconomic policy, especially in the areas of monetary and exchange rate management.

Recent months have seen heightened risk aversion arising from the US housing market sub-prime fears-the credit market contagion that erupted in July and August has had a pervasive effect on investor sentiment worldwide. As a result, de-leveraging has led to a rapid unwinding of positions in riskier exposures across bonds, equities and currencies.

During times of market turbulence, it is especially helpful and informative to be able to monitor these capital flows. Given our proprietary iFlow indicators, derived from the largest global custody system in the world, we are able to obtain unique insights on actual investor activity across markets and across asset classes. So what is iFlow telling us?

During 2007Q3, the spike in risk aversion saw global investors adjust asset allocations away from equities and into relatively safer bonds, espedally at the shorter end of the curve. Even today, appetites for safety and liquidity remain high as evidenced by still suppressed Treasury bill yields. iFlow indicators for global bond markets reveal investors continue to prefer shorter tenors as yield curves steepen amidst underlying inflation concerns. Appetite for securitized and corporate debt remains muted, while emerging market bonds remain subject to increased scrutiny.

In global equity markets, iFlow indicators confirmed strong net selling across most developed and emerging markets during July and August. In hindsight, this proved to be a short-lived tactical profit-taking exercise. Investor nerves were calmed by the US Fed's 50 bps rate cut on September 18, and subsequent weeks have seen global investors venturing back into overseas equity markets with renewed vigor. …

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