A drubbing in world equity markets and a huge flight to safety into US Treasuries this week suggests investors now doubt that a much-anticipated return to post-Covid normality is feasible any time soon.
Data from the United States and China, which account for more than half of world growth, suggests a slowdown in the recent blistering pace of the global economy alongside rising prices for all manner of goods and raw materials.
Coinciding with a resurgence in the Delta variant of Covid-19, markets may be sending alarm signals about the global economic outlook, Deutsche Bank chief FX strategist George Saravelos told clients.
"As prices have risen, the consumer has been cutting back demand rather than bringing forward consumption. This is the opposite of what one would expect if the environment was genuinely inflationary and it shows the global economy has a very low-speed limit," Saravelos wrote.
That sentiment was evident in the latest flow data too. Bank of America Merill Lynch flagged "stagflation" concerns for the second half of 2021, noting slowing inflows into stocks and outflows from high-yield assets.
Data on hedge funds' weekly currency positioning is the closest available real-time indicator of investors' thinking about the $6.6 trillion a day foreign exchange markets.
With the dollar at its highest since end-March, the latest Commodity Futures Trading Commission data shows net long positions on the dollar against a basket of major currencies is the biggest since March 2020. Positioning had dropped to a net short bet as recently as early June.
Dollar appreciation against the euro and emerging market currencies is unsurprising given economic uncertainty, said Ludovic Colin, senior portfolio manager at Vontobel Asset Management.
"Whenever Americans get worried about growth at home or globally, they repatriate money and buy dollars," he added.
In recent months, investors optimistic about an economic recovery sent a flood of cash into so-called cyclical sectors such as banks, leisure and energy. These are, in short, companies that benefit from an economic recovery.
The tide may now be going out.
Instead "growth" stocks, especially technology, have outperformed their value counterparts by more than 3 percentage points since the start of July. Many clients of Goldman Sachs believe the cyclical rotation was a short-lived phenomenon driven by recovery from an unusual recession, the bank said.
Defensive stocks such as utilities are back in favour too. A basket of value stocks compiled by MSCI is testing its lowest levels for this year against defensive peers, having risen 11% in the first six months of 2021.
Early this year, the dollar's trajectory was determined by the interest rate differentials enjoyed by US debt over its rivals, with correlations peaking in May.
While real or inflation-adjusted US yields are still higher than their German counterparts, the drop in nominal US yields below 1.2% this week has raised concern over the global growth outlook.
Ulrich Leuchtmann, head of FX at Commerzbank, said that if global production and consumption did not return to 2019 levels soon, then a permanently lower GDP path has to be assumed. This is reflected some extent in bond markets.
Investor sentiment has become more cautious, according to weekly polls by the American Association of Individual Investors. BlackRock, the world's biggest investment manager, cut US equities to neutral in its mid-year outlook.
Stephen Jen, who runs the hedge fund Eurizon SLJ Capital, noted that because China's business cycle was ahead of that of the United States or Europe, weaker data there is filtering through to investor sentiment in the West.
Popular reflation trades in the commodity markets have also gone into reverse. A ratio of gold/copper prices has fallen 10% after rising to more than 6-1/2 year highs in May.