BofA warns that risk assets are being constrained by extreme positioning and policy credibility shocks

Overview

This report is Bank of America's weekly global investment strategy observation of fund flows and cross-asset allocation, focusing on the impact of policy credibility, coordinated FX intervention, and market liquidation events on risk assets. The report notes that a dovish Federal Reserve may cause financial conditions to continue tightening until pressure from higher yields and a weaker dollar forces a shift in monetary and fiscal policy.

Core views

The core view is that upside for risk assets is limited. Although global equities, US equities, Chinese equities, technology, and semiconductor ETFs continue to attract substantial inflows, extreme bullish positioning, policy credibility risks, signs of liquidation in Asian markets, and the potential warning event of “higher yields—lower dollar” lead the report to recommend that investors refrain from adding further to risk assets and instead retreat or rotate into defensive assets, duration, and the US dollar.

Analysis framework

The report combines fund flows, BofA private client asset allocations, the BofA Bull & Bear Indicator, year-to-date cross-asset returns, deviations from the 200-day moving average, and analysis of policy events to assess marginal changes in market positioning, liquidity, and risk appetite.

Methodology notes

• Fund flow analysisGlobal fund flows

  Observe inflows and outflows by asset class, region, industry, and ETF/mutual fund category.

  Used to assess investors' actual risk appetite and crowding, such as $63.7bn of global equity inflows this week and record five-week technology fund inflows.

• Sentiment and positioning indicatorsBofA Bull & Bear Indicator

  BofA's proprietary bull and bear indicator.

  The current reading is 9.4 with a Sell signal, indicating that extreme bullish positioning remains a headwind for risk assets.

• Technical deviation200-day moving average deviation

  The dollar-denominated deviation of an asset from its 200-day moving average.

  Used to identify overbought or oversold conditions across assets; for example, gold, silver, and platinum are significantly weak relative to their 200-day moving averages.

• Client allocation monitoringBofA private client allocations

  Monitor the allocation of BofA private client AUM across equities, bonds, cash, and ETFs.

  Private client AUM is approximately $4.5tn, allocated 65.5% to equities, 17.5% to bonds, and 9.7% to cash, with equity exposure still increasing.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Global equities

  Strong fund flows but overheated positioning

  Strengths

  $63.7bn of inflows this week, with clear evidence of buying the dip.

  Weaknesses

  The BofA Bull & Bear Indicator is in the extreme bullish range, limiting upside for risk assets.

  Comparison

  Equity inflows are significantly higher than those into bonds, cash, and gold.

  Risks

  Continued tightening in financial conditions, policy credibility shocks, and liquidation events could pressure valuations.

• Chinese equities

  A bright spot in regional fund flows

  Strengths

  $15.9bn of inflows this week, with four-week inflows of $62.4bn reaching a record high.

  Weaknesses

  Still subject to global risk appetite and policy expectations.

  Comparison

  Chinese equity flows are stronger than European equity outflows and the slowdown in Korean inflows.

  Risks

  If global risk assets retreat, strong fund flows could turn into crowded-trade risk.

• Technology and semiconductors

  AI theme fund flows have not yet reversed

  Strengths

  Five-week technology fund inflows reached a record $68.5bn, while semiconductor ETFs have attracted $53bn year to date.

  Weaknesses

  The SOX has already declined 25%, but positioning remains crowded.

  Comparison

  Technology has the strongest fund flows relative to most sectors.

  Risks

  A downward revision to AI capex expectations or a failure of the macro consensus could trigger a pullback.

• Bonds

  Continued inflows, but further allocation increases require a policy shift

  Strengths

  Bonds have recorded inflows for 66 consecutive weeks, with continued inflows into IG, TIPS, municipal bonds, and Treasuries.

  Weaknesses

  Duration assets remain under pressure if yields continue to rise.

  Comparison

  Inflows are smaller than those into equities but more stable.

  Risks

  Inflation and fiscal pressures could drive yields higher.

• US dollar

  One of the defensive allocations recommended by the report

  Strengths

  Provides protection when financial conditions tighten and risk assets come under pressure.

  Weaknesses

  The dollar could come under pressure if the warning event of “higher yields—lower dollar” occurs.

  Comparison

  Relative to risk assets, the dollar is viewed as a defensive rotation destination.

  Risks

  Dollar volatility ahead of declining policy credibility and a fiscal shift.

• Gold and precious metals

  Modest inflows but weak price performance

  Strengths

  Precious metals have recorded inflows for four consecutive weeks, including $1.3bn this week.

  Weaknesses

  Gold is down 5.5% year to date and has a negative deviation from its 200-day moving average; private clients have sold precious metals ETFs over the past four weeks.

  Comparison

  Fund flows are far smaller than those into equities and bonds.

  Risks

  Volatility in the dollar and real interest rates could continue to affect performance.

Key data

• Weekly global equity inflows$63.7bnETF inflows were $71.1bn, while mutual funds saw $7.4bn of outflows.
• Weekly bond inflows$12.5bnBonds have recorded inflows for 66 consecutive weeks, while IG bonds have recorded $5.8bn of inflows for 17 consecutive weeks.
• Weekly gold/precious metals inflows$1.3bnPrecious metals have recorded inflows for four consecutive weeks, but gold's year-to-date return is -5.5%.
• Chinese equity inflows$15.9bnFour-week inflows reached $62.4bn, a record high.
• Technology fund inflows$15.7bnFive-week inflows reached $68.5bn, a record high.
• Year-to-date semiconductor ETF inflows$53bnFlows have not reversed despite a 25% decline in the SOX.
• BofA Bull & Bear Indicator9.4Down from 9.6, it remains a Sell signal.
• BofA private client allocation65.5% equities / 17.5% bonds / 9.7% cashAUM is approximately $4.5tn, and private clients continue to increase equity exposure.

Impact & implications

The portfolio implication is to reduce exposure to crowded risk assets, particularly sectors with high dependence on macro consensus views such as “no landing, no rate hikes, no reduction in AI capex, and no Democratic midterm sweep”; investors may also consider the protective role of defensive equities, duration-sensitive assets, and the US dollar in an environment of tightening financial conditions.

Risks

• A dovish Federal Reserve could create policy credibility risks, while financial conditions may continue to tighten.
• The warning event of higher bond yields occurring alongside a weaker dollar could force a policy shift.
• Extreme bullish positioning makes risk assets more vulnerable to negative macroeconomic or policy surprises.
• Strains across Asian FX, JGB yields, and Korean/Taiwanese bonds could spill over into US Treasury fund flows.
• Crowded positioning in AI-related stocks and semiconductor ETFs could lead to liquidation if AI capex expectations cool.
• Changes in US political approval ratings and fiscal spending pressures could increase inflation and interest-rate uncertainty.

What to watch

• Whether the BofA Bull & Bear Indicator continues to decline from 9.4 or whether the Sell signal is lifted.
• Whether the Federal Reserve restores policy credibility through more aggressive rate hikes around Jackson Hole.
• Whether coordinated US/Japan/Korea FX intervention can stabilize the JPY, JGBs, and Korean/Taiwanese-related assets.
• Whether record-level inflows into Chinese equities, technology funds, and semiconductor ETFs begin to reverse.
• Whether the correlation between the US 30-year Treasury yield and the dollar turns negative and triggers policy pressure.
• Whether risk assets remain constrained by positioning and policy uncertainty ahead of the US midterm elections.