The State Street Risk Appetite Index rose modestly to 0.00 in July, as the risk-off bias seen in June faded, according to data.
State Street’s Institutional Investor Indicators measure investor confidence by analysing the buying and selling patterns of institutional investors based on State Street’s $44 trillion in assets under custody and administration. The Risk Appetite Index captures investor flows in twenty-two dimensions of risk across various asset classes. A positive reading suggests that investors are adding to their risk exposures, while a negative reading indicates risk reduction.
Tim Graf, head of macro strategy for Emea at State Street Global Markets, said: “The cross-currents of political risk, economic fundamentals and higher volatility are starting to impair risky asset markets and continue to dampen sentiment. Institutional investors have proven hard to pull off the sidelines for most of this year and July proved no exception, with our breadth measure of risk sentiment neutral.”
According to analysts, the US is likely to remain the focus of political risk and monetary economics in the coming months. The status of the dollar has received outsized attention as part of the election process. “Now, softer US labour market data are weighing on rate support. Investors used July and these events as opportunities to pare back a long-standing overweight in the greenback. Time will tell if the weakness in asset markets is sufficient to spark any return of safe-haven support to the US dollar,” added Graf.
Institutional investors rush back to cash as political risk mounts
The State Street Holdings Indicators revealed that long-term investor allocations to equities rose by 37 basis points to 53.6%. Similarly, allocations to fixed income increased by 43 basis points to 27.9%, resulting in an 80 basis points drop in cash holdings to 18.5%, marking the largest drop in cash holdings since last November. Graf commented, “After a sharp rise last month, institutions had a bit more comfort in allocating away from cash this month. However, allocations to both equities and fixed income rose, underscoring the nervous and neutral stance in aggregate.”
Graf highlighted that political risk, economic fundamentals, and higher volatility are impacting risky asset markets and dampening sentiment. Despite some risk-positive behaviour, such as the reversal of last month’s rise in cash allocations, the overall stance remains nervous and neutral.
In the US, political risk and monetary economics are expected to dominate in the coming months, with the dollar’s status being a focal point. Softer US labour market data are weighing on rate support, leading investors to reduce their overweight positions in the dollar. It remains to be seen if this will result in a return of safe-haven support for the US dollar.
According to the findings, in Europe, institutional investors are losing interest in the US dollar, but this has not benefited the euro. Investors maintain a large underweight in the euro, and overseas investors continue to sell Eurozone equities. Meanwhile, the Bank of England cut rates last week for the first time since Covid, which has affected institutional investor sentiment towards the pound. Despite short-term outflows, a weaker currency could benefit UK equities, as foreign investors continue to buy.
