4 weeks ago, we reported that just as the market had peaked in the post-February bounce, Bank of America's Michael Hartnett was "stunned" by the record wall of money flooding into equities, which had just seen the biggest equity inflow on record.

Fast forward to this week, when not only is this record inflow a fading memory, but we also get the another confirmation that retail was once again been the perfect top-tick indicator, as that one week of all-in euphoria has been replaced with three weeks of near record outflows, as the fascination with "goldilocks" fades while fears that deflation is returning pushes capital out of risk assets and into Treasurys.

According to the latest EPFR data collated by Bank of America, in the latest weekly "risk off" flows, investors pulled $7.2 billion from stock funds, of which $9.9 billion came from the U.S. as $2.4 billion was pulled from Europe, while Japanese and emerging-market equity funds saw inflows. In fact, as Hartnett described it last week, the "last QE Trade" - flows into Japan stocks driven by the BOJ remaining as the only central bank that is not even contemplating tightening, or tapering QE - has now seen 18 consecutive weeks of inflows.

Meanwhile, as the equity euphoria fizzles, the "inverse great rotation" is back, as billions are once again parked in Treasurys: according to EPFR, $4 billion went into "Treasury Island" - the biggest government fund inflows since February 2016. Discussing this unwind, Hartnett said that the Treasury inflows are the “most visible expression of positioning for risk-off to date,” adding that he still thinks “sell-any-rip" - in equities - "is a much better ‘18 strategy."

Investors are returning to Treasuries as the U.S. 10-year yield retreats from its 2018 high of 2.95% set in February, and which may have been the top-tick for the year. On Friday, amid a chaotic day of payrolls, Powell speaking and a new trade war salvo, the 10Y slid as low as 2.78%. And, as the chart below shows, based simply of cumulative inflows, 2.00% on the 10Y is imminent especially with BofAML private client debt allocation rising to 23.3%, a 5-month high, and growing.

According to Hartnett, these Treasury inflows "are the most visible expression of positioning for risk-off to date."

That said, not all remnant of the risk-on trade are gone: investor infatuation with emerging markets continues, and in the week ended April 4 there were more inflows to EM debt & equity funds ($5.4bn). Surprisingly, the cumulative EM inflows are now at an all-time high of $363bn.

How to explain this relentless EM bid? To Hartnett, the inability of the 10Y to break 3% plus the stubborn US$ weakness "helps explain EM resilience to rising trade war concerns."

That said, a few more days of trade war fears on full display, and the unwind of the EM will make the recent bursting of the crypto-bubble seem like a gentle stroll in the park.

We conclude with Hartnett preview of what to expect in Q2 and specifically, the “pain trade” to come:

vol, credit, stocks, tech all corroborating simple fact that Fed well into a tightening cycle in ‘18, profits peaking; but US$ is not…on contrary, spec positions very long Euro; best “pain trade” now long US$, short EM (chart 4); DXY requires protectionism to hit PMIs and/or surge in wages to break decisively higher (i.e. >91).



And as we showed earlier this week, PMIs are already getting slammed bigly, and protectionism was the key factor cited. As for the real catalyst for a surge in the DXY - and a crash in risk assets - look no further than this chart from Citi of the blowing out Libor-OIS and the lagged DXY for a sense of the "pain trade" that is coming next.