Dow futures
The U.S. stock market rally could face major hurdles in the near term as investors continue to favor safe plays. | Image: Johannes EISELE / AFP

Futures on the Dow Jones Industrial Average (DJIA) rallied at the start of Monday’s session, fueled by the recently announced trade truce between the United States and China.

While demand for risk-on assets has improved, the long-term inflow into money market funds suggests investors are preparing for the worst.

Dow Futures Move Higher

Futures on all three major U.S. indexes traded in positive territory Monday, though gains were limited following the explosive rally of this past Friday. Dow Jones futures edged up 38 points, or 0.1%, to 26,813.00.

Dow Jones futures
Dow Jones futures rally as much as 119 points in early Monday trading. | Chart:

S&P 500 futures were up 0.1% at 2,973.25. The Nasdaq 100 contract added 0.1% to trade at 7,864.50.

Money Market Inflows Continue to Surge

Money market funds – the component of the financial system that provides short-term capital for corporations, banks and governments – have pulled in $322 billion in the last six months, marking the highest accumulation phase since the financial crisis back in 2008. The total assets held in these types of funds is inching closer to $3.5 trillion, the highest since September 2009.

Since money market funds invest in short-term debt securities like U.S. Treasurys and commercial paper, they are widely considered to be risk-off assets. Not only are they insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000, banks use the money from these funds to invest in low-risk, highly-liquid assets.

Although large inflows into money market funds isn’t a problem in itself, the last time investors poured so much money into this market segment was during the financial crisis. It seems that investors are becoming more sensitive to negative headlines tied to the U.S.-China trade war, weak economic growth and political threats emanating from Europe and Asia.

Activity in the bond market is also foretelling of a major recession over the next two years, a phenomenon that would have adverse consequences on stocks.

It’s also not entirely apparent whether the Trump administration’s recent trade truce with China will produce a more comprehensive agreement. Chinese state media is already skeptical about such a conclusion and both sides remain far apart on the main sticking points, including revamping Chinese industrial policy, fixing intellectual property laws and getting Beijing to stop overly subsidizing domestic companies.

As it now stands, the partial trade deal is merely an agreement for the U.S. to hold existing tariffs on Chinese goods in exchange for more agricultural shipments to China.

This article was edited by Josiah Wilmoth.

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