Investors are rebuilding cash buffers in a manner JPMorgan describes as reminiscent of the market behavior seen in 2022, according to a note released by the bank.
Quantitative strategist Nikolaos Panigirtzoglou told clients that, since the start of the Iran war, market participants have been "abandoning equities, bonds and gold all at the same time, preferring instead to raise their cash allocations." The bank interprets this simultaneous move away from multiple risk assets as a signal of elevated caution among investors.
JPMorgan links the shift in positioning to growing unease that central banks could repeat earlier policy mistakes. The bank highlighted an inversion at the front end of core yield curves, which it says has heightened concerns about central bank guidance in a similar fashion to the stress witnessed in 2022. At the same time, Panigirtzoglou noted that there is still "little evidence of de-anchoring of long-term inflation expectations."
The bank constructed implied cash allocations using global M2 relative to equities and bonds. Those implied allocations have increased only modestly to date, JPMorgan said, and remain "still low by historical standards." The persistence of low cash allocations, even after the recent rise, represents what the bank calls "a headwind to both equities and bonds" while uncertainty remains elevated.
Concerns related to the conflict in the Middle East have also prompted a repricing in global rate markets. JPMorgan described investor fears that an energy shock could exacerbate inflation pressures, pushing central banks to tighten policy within the year and increasing the risk of policy mistakes.
Reflecting these dynamics, rate markets have adjusted their expectations - earlier rate cuts have been priced out and markets have "priced in significant rate hikes over the coming three quarters," the bank said. Equity positioning has also moved lower, with JPMorgan's overall indicator now at the 62nd percentile, down from 81 percent in late January.
Summary
JPMorgan reports a renewed move into cash by investors since the Iran war began, driven by worries over central bank policy and potential inflationary effects from an energy shock. Cash allocations have risen modestly but remain low historically, creating pressure on both equities and bonds while rate markets shift toward higher near-term hikes.
Key points
- Investors are simultaneously reducing exposure to equities, bonds and gold in favor of cash, per JPMorgan's note.
- Front-end yield curve inversion is raising concerns about central bank policy errors similar to those in 2022.
- Rate markets now expect significant rate hikes over the coming three quarters, and equity positioning has fallen to the 62nd percentile from 81 percent in late January.
Risks and uncertainties
- Risk that an energy-driven inflation shock could prompt central banks to tighten policy this year - this affects rates-sensitive sectors and fixed income markets.
- Possible policy mistakes by central banks, signaled by front-end curve inversion, which may impact both equities and bonds.
- Elevated geopolitical uncertainty connected to the Iran conflict, which is prompting asset reallocation and could continue to influence global rate markets.