Who owns what as the debasement trade returns?

Investing.com -- The "debasement trade" is back, Barclays strategists led by Emmanuel Cau argue, weighing on bonds and the dollar while lifting gold, even as solid earnings keep equity flows steady.

Long-only equity flows remained strong in August at roughly $150 billion, keeping 2026 on track for a record full-year haul, Barclays noted. Sentiment recovered quickly after July’s momentum washout, aided by buying from risk-control funds, while retail demand improved though it remains subdued relative to institutional activity. Hedge funds trimmed longs at the margins but broadly maintained high equity exposure.

Equities continue to see stronger demand than cash and bonds, widening the year-to-date gap. Higher oil prices have revived demand for inflation hedges like TIPS, while Treasury shorts have increased as investors continue to shun long-duration assets, the strategists said.

They point out that the debasement trade is being driven by "record debt issuance and intervention risk," with all eyes now on Jackson Hole, where the strategists said clarity from Fed Chair Warsh on the central bank’s reaction function to inflation "would be welcomed by markets."

Earnings remain a backstop for equities, but the strategists flagged risks from rising macro volatility, AI-driven capital supply concerns, and typically challenging pre-midterm seasonality. "A continued grinding higher remains our base case, but likely requires calmer bond and oil markets, amid a typically volatile back-to-school period," they wrote. 

U.S. equity flows bounced back to about $85 billion last month despite waning dollar sentiment. European inflows remain small and continue to lag the region’s macro improvement, partly due to the rebound in oil. Periphery demand is outpacing core countries, with France hit particularly hard by fiscal concerns. Emerging-market demand remains skewed toward Korea and Taiwan, while Japan inflows stayed tepid as yen shorts were cut following intervention.

In terms of positioning, Tech and momentum stocks stabilized, though market breadth fell below average in August. European Banks and other AI capex beneficiaries, including Semis, Capital Goods, Materials and Utilities, remain well owned, while crowding within AI losers and consumer names has eased from recent lows, the strategists noted. Value continues to be preferred over Growth and Quality.

Barclays said options markets point to calmer indices but more active single stocks, with elevated single-stock volatility and earnings dispersion suggesting a market "increasingly driven by stock-specific opportunities."

Key pain trades flagged by the strategists include: equities down alongside rates; cyclicals down as defensives rise; capex plays and banks down as consumer stocks gain; AI winners down as AI losers rise; and oil moving higher.