Tim Graf: Hi everyone and welcome to this month's update to our read of investor flow and positioning for the month ended August 29th. I'm Tim Graf, head of Macro Strategy for Europe at State Street Markets and the host of our weekly podcast Street Signals, and I have the pleasure of walking you through the message given by the changes in our indicators of institutional investor flow and positioning during what was actually a pretty calm month for markets.

Given this was a month when challenges to Fed independence came to the fore and questions over sovereign fiscal positions came more into focus at the end of the month, you'd be forgiven for wondering what all the fuss was about. Global equity markets actually finished the month 2.5% higher and just under 1% off all time highs set earlier in the month.The catalysts for that risk market strength were continued strong earnings performance for Q2, especially from the all important tech sector of the equity market. August also brought a modest shift in message from the Federal Reserve, signified by Chairman Jay Powell's remarks at the Fed's annual Jackson Hole symposium. Powell set the stage for a resumption of the Fed's easing cycle come their 17th of September meeting. He also offered a more general tone of wanting to see rates move further towards the Fed's estimate of neutral in response to what was some pretty weak labor market data that was released at the start of August.

For their part, the behavior of institutional investors was pretty steadily risk seeking throughout the month. Maybe wasn't as strong as the dip buying that we saw following the Liberation Day induced correction in markets, but it was still robust. In fact, after that blip in sentiment around the tariff announcements in March and April and then carrying through into May, the net sentiment score that we track has been positive for more than three months. The aggregate positions of institutions are also starting to look a little bit full. We see more overweights relative to benchmark in risky assets than we do underweights. But as the title of this month's presentation suggests, after a volatile round trip in the spring, markets have taken a positive approach through the summer right up to its end. Whether that can be sustained for another quarter depends on a few things, particularly whether the catalysts for optimism decent earnings growth easier policy can also be sustained.

Consensus risk is also a big question mark here. At the highest level of positioning, the weight in equities is still well above its long run average as the left hand chart on this slide shows, and the weight to bonds has shown few signs of picking up. That's perhaps not too surprising given the realities of a potential short term spike in US inflation from tariffs. Cash balances have been steady around their long term average for the last two years. They aren't really moving somewhat. Surprisingly, the weight to equities actually dropped a tiny bit this month and the weights to bonds and cash did rise a little bit. Now this obviously wasn't enough to derail the broader tilt in sentiment, but nevertheless you typically do see such shifts during periods of volatility. However, this time around vol stayed low and the changes investors made to their portfolio weights were pretty small. And context matters here. Year to date, the shift has obviously been to allocate more capital to equities out of cash, so the small moves last month look more like a minor blip in a broader risk positive trend.

This then continues to be an episode that's more about slight rotation within a broad risk positive atmosphere. Institutions have still lowered their weight to US equities year to date, and they also did so to a very slight degree in August. But again, as we can see from both charts on this slide, they've hardly abandoned ship. In fact, investor positions in US equities are still far and away the largest country holding out there on either the over or the underweight side, and that's completely counter to any thought of a sell America trade that might have been discussed earlier this year. The buying of European equities continues to be sluggish and aggregate holdings are back below neutral positions in EM equities. Give a hint as to where the rotation within equity market assets is going. EM equity positions are still heavily underweight, but as we can see on the right capital is coming in, particularly into Chinese shares.

The move away from the US is much more apparent in currency flows. After taking a brief break from selling dollars in the middle of the summer - we all need a vacation after all - the outflows have resumed and dollar underweights are growing once again. The position is now extreme, but it does have the potential to grow further when we look at more granular position data and especially our hedge ratio indicators. Foreign holdings of dollars are now underweight, but they can also represent a potentially significant source of dollar selling to come if foreign investors decide to hedge away the FX risk that's embedded into those huge holdings of US assets, particularly US equities. As it was in the spring, the euro has been a key beneficiary of dollar selling and investors continued to buy the euro in August. However, much like we now have an extreme dollar underweight, we now also see one of the most pronounced euro overweights across portfolios in years, but like the dollar underweight, it can also continue to grow, not least because inflows into the euro remain strong. But it is helpful to know that that this is now as it is with the dollar, a consensus position.

To close out, the message this month is positive. Institutions bought the dip in late Q2 and early Q3, and they continue to add to risk positions as we get towards the middle of the third quarter. There's a strong demand for yield in currencies as well as in corporate credit, but dividend yield in equities is out of favor. EM equities, particularly China, are seeing good inflows, and investors continue to sell the US dollar and buy commodity sensitive currencies.

It's not all positive. We do see a move away from cyclically sensitive equities and in fixed income, the demand is more for safer core sovereign bonds rather than EM sovereign bonds with dollars being sold. Other safe havens like the Swiss franc and the Japanese yen are on the other side. Institutions are buying now.

These negatives don't come anywhere close to outweighing the positives, but those consensus risks I talked about in positions, those are worth bearing in mind. Flows are still going in the right direction for now at least. Good luck this month.