Investors fled from bonds and piled into equities ahead of the expected Federal Open Market Committee rate rise that failed to materialise.
Data from Bank of America Merrill Lynch showed that bonds saw $3.3bn (£2.1bn) of outflows going into the US rate rise decision, marking six consecutive weeks of outflows for the sector.
Meanwhile equities saw $23.8bn of inflows – the largest in 10 weeks – among which were large inflows to Japan funds.
Japan took $5.1bn of the inflows as investors sought safer havens less affected by any US rate rise. However, US equities garnered the largest inflows of $16.7bn, although $11.4bn of those were into the SPDR Trust Series I ETF, which tracks the S&P 500 index.
However, emerging market funds continued to be shunned amid concerns of the effects of a stronger dollar.
The decision by the Fed not to raise rates is likely to benefit equity markets, says Bank of America Merrill Lynch, giving them more stability.
“We see this as similar to when the Fed deferred tapering in 2013. The Fed waited, markets wobbled initially, eventually recovered and then reacted calmly when it eventually tapered in December 2013,” says the research note.
“Investors, we think, can put the Fed back on hold for a while unless market conditions and newsflow out of Asia and emerging market improve.”
The market volatility and bond outflows ahead of the Fed’s decision show the limitation of forward guidance coming from the US, says David Scammell, fund manager at Santander Asset Management.
He says: “The Fed has itself become a source of volatility, and the market is likely to be very data dependent in upcoming months.
The Fed is still likely to pursue a slow and gradual pace of hikes this year, he adds.
“The market is much less convinced, with the money-markets pricing in an even gentler and flatter hiking cycle and bond yields back at the lower end of defined ranges.
“The risk to this viewpoint is that the bond markets will decide that the underlying story is one of secular stagnation.”
However, Nick Gartside, CIO of fixed income for JP Morgan Asset Management, says that two factors should be top of investors’ watch lists – the volatility in global markets and emerging markets.
“If both of these stabilise, and if their respective impact on the US economy remains limited, there’s no reason the Fed can’t hit the lift-off button this year,” he adds.
But while assets are moving out of bonds and into equities, investors need to look at a stock-specific level to find the winners and losers of the announcement and any eventual rise, says Felix Wintle, head of US equities at Neptune Investment Management.
In particular, companies overly reliant on raising capital to run their businesses are likely to be hit hardest when an interest rate rise does occur. In particular energy, materials and industrials are likely to be hit hardest, says Wintle.
“In contrast, there are other parts of the market which are unaffected by this new normal, like healthcare, consumer discretionary and technology,” he adds.
Most market participants are still factoring in a rate rise before the end of 2015, although this is likely to be a 25 basis points increase.
However, Steve Blitz, chief economist at stockbroker ITG, says unless the situation in China improves there is unlikely to be movement by the Fed.
“Looking forward, the China story is not likely to get better before it gets worse. As this slo-mo implosion reverberates through the global economy, the last the thing the Fed wants to be doing is being the only central bank raising rates and therefore boosting the dollar.
“In other words, unless there is some miraculous turnaround in China (always possible when you can throw naysaying traders and media in jail) is it wait ‘till next for a Fed move.”