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London. Investors may start to see warning signs soon as their allocations into risky assets move to extremes only halfway into the first quarter, while earnings and inflation-related risks are mounting.

World stocks, as measured by MSCI, raced to 30-month highs in the past week. The index has gained more than 5 percent this year, more than half of last year’s total gains.

The flow of money into US equity markets is gathering pace. Investors put a net $9.45 billion into US equity mutual funds last week, the highest since mid-June and four times the previous week’s inflows.

“It’s a typical beginning of the year rotation where investors are taking profit on last year’s winners and chasing laggards,” said Didier Saint-Georges, a member of the investment committee at private asset manager Carmignac Gestion in Paris.

Emerging stocks have turned lower so far this year with a loss of 3 percent in the year to date, having risen 16 percent last year.

“It doesn’t take into account risks hovering over the euro zone sovereign debt problem and related risk on the banks. In the short term there’s a money flow that could reverse,” he said.

The euro zone sovereign debt crisis certainly is lingering, with banks tapping the European Central Bank for an unusually high amount of emergency overnight borrowing in the past week.

ECB figures showed on Friday banks borrowed more than 16 billion euros ($21.89 billion) in costly overnight funding — the highest since June 2009, on top of Thursday’s 15 billion euros. The sum compared with 1.2 billion euros borrowed earlier in the week.

This is fanning fears that a euro zone bank could be facing serious funding problems.

Ireland goes to the polls on Friday in the first general election since the debt crisis. German Chancellor Angela Merkel’s party also faces a series of possible defeats in seven state elections, which started with Hamburg on Sunday.

“This could further limit her room for maneuver in EU fiscal matters,” BNP Paribas said in a note to clients.

Euro zone business and consumer sentiment indicators are due in the coming week, while many European financial companies, including Commerzbank, Royal Bank of Scotland, Allianz and Credit Agricole, report their results. According to Thomson Reuters data, financial companies on the European benchmark STOXX 600 index have so far reported earnings that were 8.3 percent below their estimates.

Five out of 10 equity sectors in the STOXX 600 index reported earnings that were below estimates. Overall, however, actual earnings are 4.4 percent higher than the estimates.

The monthly fund managers survey from Bank of America Merrill Lynch showed average cash holdings fell to 3.5 percent in February from 3.7 percent, a level that the bank views as an equity sell signal. In the past, investors have sold stocks in subsequent weeks five out of seven times when cash was at this level.

“From the technical and policy view, there are some amber warning lights,” said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh. “Looking ahead, I am a little concerned. All the good earnings news is by and large over.”

And finally, investors will be monitoring the impact of political turmoil in the Middle East, which helped push the region’s debt insurance costs across the board and lifted London crude oil prices to two-and-a-half year highs above $104 a barrel in the past week.

The cost of insuring Bahrain’s sovereign debt against default for five years hit fresh 18-month highs as thousands gathered to bury protesters killed in a crackdown against antigovernment rallies this week.

 

Reuters