Emerging markets are constrained by a number of factors. The U.S.’s rapidly increasing interest rates are putting pressure on emerging market sovereign bonds. While seasoned investors in emerging markets are no stranger to volatility; these days it is coming from too many angles. War in Ukraine, political instability, oil prices, continuing covid-19 related problems, and currency pressures are all coming at once. This has caused a $52 billion dollar to pull according to JPMorgan. All of these pressures increase the spread in yields for emerging market bonds, and the rapid ballooning of these yields has sent their prices off a cliff. Many emerging markets are also facing real fiscal problems. However, there are resilient larger EM economies that can take the brunt of the shocks.

Finsum: If the global economy slows it could be detrimental to EM which can be export-dependent in an already volatile time.

With fixed-income securities starting to look attractive again, fixed-income ETFs saw the most inflows during the week ending July 15th. Over $7.6 billion flowed into ETFs last week with over 90% ($6.9 billion) flowing into U.S. fixed income ETFs. The iShares U.S. Treasury Bond ETF (GOVT) saw the highest weekly inflows with $2.4 billion. It appears investors are adding fixed income back to their portfolios as yields have risen above 3%. The June Consumer Price Index came at a scorching hot 9.1%, which means the Fed is expected to increase rates another 75 or even 100 basis points in their next meeting. This could drive bond yields even higher. That makes bonds more attractive to investors and money managers due to higher yields and lower prices which should result in more flows into fixed-income ETFs.

Finsum: Higher inflation combined with rate hikes are making fixed-income securities more attractive to investors leading resulting in fixed-income ETFs dominating fund flows.

According to a new survey by the alternative investment platform AssetTribe, the demand for alternative investments is expected to grow by up to 46% over the next 12 months. The research showed that the growth in demand for alternative assets is due to the current rate of inflation, an increasing need to diversify portfolios, and the potential for higher returns. The survey was conducted with over 580 sophisticated investors across the UK and Europe. According to the survey, the most popular alternative assets were real estate at 75%, long-term asset funds at 62%, and carbon net zero funds at 51%. The survey also showed that the wealthiest participants invested far more in alternatives than those with smaller portfolios.

Finsum: Due to inflation, diversification, and the potential for higher returns, the demand for alternative investments is expected to rise almost 50% over the next 12 months.

Even with the market up for a third straight day, don’t expect volatility to disappear anytime soon. That is according to two market strategists. In a recent media appearance, Citi's Institutional Clients Group chairman Leon Kalvaria warned that more market volatility is to be expected until inflation and rate hikes stabilize. In a separate media appearance, BlackRock Americas iShares Investment Strategy Head Gargi Chaudhuri also says he expects volatility to continue on the backdrop of higher inflation and increased politicization. Recent gains aside, with rates expected to continue to move higher and consumers feeling the crunch of higher energy and food prices, market volatility is likely here to stay.

Finsum: With more expected rate hikes to combat persistent inflation, don’t expect market volatility to disappear anytime soon.

Investors are shortening up their duration to the ultra-short fixed income ETFs which were first created about 15 years ago. Originally used for cash management, many investors are looking to these ETFs for security in the economic turmoil flummoxing markets currently. Generally, these assets have been tough to classify but by in large they are of duration of less than a year. SPDR Bloomberg 1-3 Month T-Bill ETF and State Street Global Advisors saw large inflows in the first half of 2022. While these assets generally get an uptick during volatility, they are seeing special attention due to interest rate risk. With inflation setting 40-year records investors want security against the Fed's rapid tightening cycle which is pushing up yields and bond prices lower. This means they are buying ultra-short duration debt with less risk.

Finsum: The latest GDP release will be a huge tell for the Fed because it could stall tightening if we slip into a recession.