Funds Surge 49%: Capital Flight Fears Rise
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The United States has recently released its latest services PMI index, which has plummeted from 56.5% in the previous month to the latest 49.6%, also marking a fall below the 50-point threshold that separates growth from contraction.
The market had previously anticipated a slight decline to 55, but the actual figure far exceeded the expected drop.
This is the first time since May 2020 that the index has fallen below 50, signaling the end of a two-and-a-half-year expansion and officially declaring that the U.S. service sector has entered a state of contraction.
On the other hand, the manufacturing PMI index currently stands at 48.4, which has been on a continuous downward trend over the past five months on a month-over-month basis.
Under the combined influence of these data, the Federal Reserve may have no choice but to further slow the pace of interest rate hikes. After previously reducing the magnitude of rate hikes to 50 basis points, it is possible that the next rate hike, scheduled for early next month, will be reduced to 25 basis points.
For stock market investors, this could be good news, but it is important to note that this could lead to a further decline in the U.S. Dollar Index, potentially breaking below the 100-point mark.
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As the U.S. Dollar Index continues to fall and the dollar depreciates, funds that previously flowed into the U.S. market may turn around and flow out, ultimately exerting selling pressure on both the stock and bond markets.
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The U.S. Department of the Treasury releases a monthly report on international capital flows.Reviewing recent reports, we find that as of last September, the cumulative net inflow of funds to the United States for the first nine months reached a staggering $1.2 trillion, marking a growth rate of 49% compared to the first three quarters of 2021.
However, funds attracted by the appreciation of the US dollar are likely to flow out rapidly if the dollar depreciates. As the US Dollar Index depreciates, it implies that other non-US currencies are appreciating, especially for emerging markets, whose attractiveness may far exceed that of the US market.
After all, in 2022, despite the continuous appreciation of the US dollar, the performance of the US capital market was disappointing, with both stocks and bonds experiencing significant declines.
In contrast, in 2023, China is expected to face a strong rebound in exchange rates and a substantial increase in the stock market. Under this expectation, the capital inflow into China will noticeably increase.
Market performances similar to China's may occur in many other countries, with varying degrees of magnitude, which poses a significant attraction to the funds that previously flowed into the United States.
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Additionally, another large-scale capital outflow is possible in the United States. After the US raised interest rates last year, the transaction volume of the US real estate market began to decline continuously. By the third quarter of last year, US housing prices, which had been rising, finally stopped and started to fall.
Before the US lowers interest rates, the average mortgage interest rate may continue to rise. Under this pressure, US housing prices may continue to decline.Referring to data prior to the 2008 subprime mortgage crisis, once the majority of homebuyers realize that the pressure of mortgage payments far exceeds their expectations at the time of purchasing, there is a possibility that housing prices could fall by 20% to 30%.
This implies that, in addition to capital flowing out of the stock and bond markets, there is also a potential for outflow from the U.S. real estate market. Should the real estate market collapse, it would be a nuclear-level blow to the U.S. financial market.
The $1.2 trillion that flowed into the U.S. last year not only has the potential to flow out in its entirety, but coupled with the outflow from real estate, the capital flight from the U.S. in the future could be far greater than imagined.
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