With the U.S. midterm elections approaching, global capital is accelerating its exit from risk assets. The latest "Flow Show" report from BofA Securities shows that investors are hoarding cash at the fastest pace since the outbreak of the COVID-19 pandemic, while betting that the election outcome will become the most important directional catalyst for stocks before year-end.

BofA global investment strategist Michael Hartnett noted in an October 8 report that the November 3 U.S. midterm elections are the biggest potential catalyst for a ±10% swing in global stocks before year-end. Current market forecasts show the probability of a Democratic sweep of both chambers has risen to 64%, a sharp jump from 49% in September. If that scenario materializes, U.S. stocks would face more than 10% downside risk. At the same time, BofA's Bull & Bear Indicator fell from 8.8 to 8.1, continuing to maintain a "sell" signal.

This week's global fund flow data confirms the market's defensive mood: $166.4 billion poured into money market funds, the largest weekly inflow since April 2020; U.S. Treasuries saw a net inflow of $16.6 billion, the largest since April 2025; and financial stocks suffered their largest weekly net outflow since March 2026 at $3 billion.

Cash Is King: Money Market Fund Assets Top $8 Trillion

This week's fund flow data shows clear risk-aversion characteristics. According to EPFR data cited by BofA, money market funds attracted $166.4 billion in a single week, the largest inflow since April 2020. Global money market fund assets under management have climbed from $5 trillion in 2023 to $8 trillion, and the current 4.2% short-term Treasury yield generates about $330 billion in annual interest income for holders.

BofA pointed out that whether "cash on the sidelines" can flow back into risk assets depends critically on a shift in monetary policy. Historical data shows that large-scale cash withdrawals only occur during major quantitative easing (2009 QE1, 2020 QE4) or sustained rate-cutting cycles. The current probability of a Fed rate hike in October is 17%, while the probability of a hike in December is as high as 81%. Global central banks have already raised rates 54 times this year, returning to a tightening cycle for the first time since September 2023. BofA's conclusion is simple and clear: no rate cut, no cash movement.

On BofA's private client side, within $4.6 trillion in assets under management, equity allocation is 66.2%, bonds 17.1%, and cash 9.4% — the latter at a historic low. Over the past four weeks, private clients have continued to buy bank loans, industrial stocks, and municipal bond ETFs, while reducing holdings in consumer staples, emerging market bonds, and consumer discretionary.

Three Midterm Election Scenarios: From "Stock Market Plunge" to "Bubble Frenzy"

BofA characterizes this midterm election as a key political node for the Trump administration in advancing its "AI war" and resource monopoly strategy. Current Polymarket forecasts show a 64% probability of a Democratic sweep, a 28% probability of a divided Congress (Republican Senate + Democratic House), and a 9% probability of a Republican sweep. Trump's overall approval rating is only 38%, his economic approval rating is 34%, and his inflation approval rating is 27%, all near lows for this term.

BofA outlines three election scenarios and their corresponding market impacts:

Democratic sweep (64% probability): BofA views this as the biggest risk scenario. Stocks would fall more than 10%, the dollar and bond yields would decline in tandem, and international stocks would relatively outperform, though Europe would do better than Asia. Democratic governance means a reversal in tax and regulatory direction, pressure on corporate earnings, and a sharp weakening of Trump's political capital on issues such as AI competition with China and resource monopolies.

Divided Congress (28% probability): BofA sees this as the "gridlock = Goldilocks" scenario, with stocks likely rising more than 5%. The dollar strengthens, tech stocks benefit from continued expectations of AI data center expansion, and bonds perform relatively quietly. BofA recommends referring to the "U.S. presidential cycle" pattern, where the third year is usually the strongest year for stocks.

Republican sweep (9% probability): BofA considers this the biggest surprise scenario, with stock gains potentially exceeding 10%, the AI theme entering a "bubble-like" 2027, and the market fully shifting to "long artificial intelligence (Nasdaq 100), short AI-unrelated assets (S&P 500 equal weight)."

The key to whether Democrats can sweep lies in the Senate map. According to Bloomberg citing Polymarket data, Democrats must flip at least four of six Republican seats: North Carolina (97% flip probability), Alaska (74%), Texas (67%), Ohio (63%), Maine (58%), and Iowa (44%), while defending three vulnerable Democratic seats in Georgia (97%), New Hampshire (90%), and Michigan (72%).

Latin America Shifts Right Politically, Brazilian Stocks Hit Record High

Former Brazilian President Bolsonaro won the election, further consolidating the political rightward shift in Latin America. BofA data shows that right-wing governed countries in Latin America have expanded from seven several years ago (covering 60 million people) to 11 (covering 420 million people).

On the day Bolsonaro won, Brazilian stocks hit a record high, and the 10-year government bond yield plunged 124 basis points in a single day, a record. BofA noted that Latin American stocks as a whole are still 35% below their historical high, while U.S., Japanese, Asian, and European stock markets are all near or at historical highs. Latin America is expected to become the protagonist of the next "rolling international bull market" — following Europe (first half of 2025), Japan and emerging Asia (second half of 2025 to first half of 2026). BofA views Latin American equities as the best trade to bet on the U.S. "Monroe Doctrine" policy.

Europe's political landscape is also shifting right. Italy and Germany have completed their political right turns, and France's Le Pen leads in polls for the April 2027 presidential election. BofA specifically noted that in Spain's snap election on November 29, a center-right party leads. If it wins, that would be a positive signal for eurozone bonds that the market has underestimated.

Bonds End the Bubble: South Korea Case Sounds the Alarm

BofA cites the South Korean market as the latest case of "bonds ending the bubble." Over the past 18 months, South Korean government bond yields have risen by a cumulative 200 basis points, and shares of South Korea's largest retail brokerage, Mirae Asset Securities, have fallen 65% from their May 2026 high — after the stock had previously achieved a "fourfold gain."

BofA believes this pattern closely matches the historical regularity in which rising bond yields puncture asset bubbles. Against the backdrop of global central banks returning to a rate-hiking cycle, BofA advises investors to watch for "yield peak" trading opportunities, including 30-year U.S. Treasuries (GT30), small-cap stocks, REITs, and Hong Kong real estate, while maintaining long-term bullish allocations to gold, commodities, and emerging markets.

In the tech sector, BofA believes investors are already extremely overweight and advises against adding more, leaning toward the view that "MAGS outperforms SOX" (growth stocks outperform semiconductors); Chinese tech stocks are seen as an option with contrarian investment value.