Investors have begun increasing their cash holdings in a move that resembles market behavior seen in 2022, as geopolitical tensions and policy uncertainty continue to weigh on sentiment, according to a research note from JPMorgan.
Quantitative strategist Nikolaos Panigirtzoglou said market participants have been “abandoning equities, bonds and gold all at the same time, preferring instead to raise their cash allocations” since the outbreak of the Iran war.
JPMorgan noted that the shift reflects growing anxiety that central banks could repeat policy errors similar to those seen in previous cycles.
“The inversion at the front end of core yield curves has raised concerns about central bank policy mistakes in a similar fashion to 2022,” Panigirtzoglou wrote, adding that there remains “little evidence of de-anchoring of long-term inflation expectations.”
Panigirtzoglou explained that implied cash allocations — estimated using global M2 money supply relative to equity and bond markets — have increased only slightly so far. However, they remain “still low by historical standards,” which represents “a headwind to both equities and bonds” as long as uncertainty persists.
The ongoing conflict in the Middle East has also contributed to shifts in global interest rate markets.
JPMorgan said investors are worried that the energy shock “will compound an inflation problem, inducing central banks to tighten policy this year, and raising the risk of a policy mistake.”
According to the bank, interest rate markets have adjusted expectations by removing earlier forecasts for rate cuts and instead “priced in significant rate hikes … over the coming three quarters.”
At the same time, positioning in equities has weakened significantly, with JPMorgan’s overall positioning indicator now at the 62nd percentile, down from 81% in late January.