The latest State Street Risk Appetite Index for August has ticked up to 0.09, up from 0.0 in July, despite an uneasy start to the month.
Kicking off with the biggest spike in volatility seen all year – driven by a significant sell-off in the tech sector and the carry trade unwinding – Marija Veitmane, head of equity strategy at State Street Global Markets, said that August went on to exceed expectations.
“August is supposed to be a quiet month, when investors rest up, catch up on projects, read and prepare for the final push into the year end. Not this year!” Veitmane said.
“Institutional investors were quick to respond – selling risky stocks, currencies and switching from stocks to cash. However, this bout of risk aversion did not last as the market quickly repriced the Fed’s rate cutting cycle.”
As such, risky assets recovered their losses and institutional investors started dipping back into risk trades.
“Fed chairman Jay Powell soothed the market saying that the time has come for policy to adjust, sparking a rebound in risk as well as more constructive equity and FX flows into month end following positioning adjustment,” Veitmane said.
“We are now watching those flows closely to see if the sparks of more constructive risk sentiment will fire up a risk rally or if recessionary fears will turn them into ashes.”
Elaborating on the reduction in allocations to stocks, Veitmane said, “this gives us hope that even if economic data takes a turn for the worse, institutional investors are somewhat prepared for the market weakness, suggesting potentially less aggressive sell-off”.
Also in August, institutional investors increased their allocation to cash “a little” (55 bps), but this allocation remained “not far” from long-term averages.
August marks the second consecutive month that investor appetite has not been in explicitly negative territory. Namely, State Street’s Risk Appetite Index rebounded from -0.09 in June to 0.0 in July.
Despite the modest rise, State Street noted that July’s risk sentiment result stayed broadly on trend for most of the year, with investors still proving to be “hard to pull off the sidelines”.
“The cross-currents of political risk, economic fundamentals, and higher volatility are starting to impair risky asset markets and continue to dampen sentiment,” Timothy Graf, State Street Global Markets EMEA head of macro strategy, said at the time.
