After a year of living with a credit crunch it would be tempting to conclude little has changed. In August 2007 institutional investors clearly signaled a rise in risk aversion when the State Street Global Markets' regime map shifted into the conservative ‘safety first' regime. Fast forward to the present and that is once more where the map is positioned.

However, as the Greek philosopher Heraclitus of Ephesus noted: "Nothing endures but change." The concerns that pushed investors to the sidelines last summer are very different to those that are to the forefront today. Indeed, since this column last appeared in July there have been big changes in the behaviour of institutional investors, reflected by the pattern of cross-border equity flows.

In the summer inflation fears were clearly dictating investor behaviour. Back then flows into developed equity markets over the previous month were close to a record, in the 99th percentile (flows only higher on 1% of prior monthly time periods in the eleven year history of the cross-border equity flow indicator). At the same time investors were shunning government bonds which saw yields soar in the second week of June in line with interest rate expectations. The regime was liquidity abounds, one of the most bullish of the five gradations of risk appetite identified by the map.

Once more, August has been a tipping point for markets. When European Central Bank governor, Jean-Claude Trichet, commented that growth prospects were deteriorating faster than anticipated he crystallised mounting concerns over the state of the global economy. The announcement since that Q2 GDP fell 0.2% in the euro-zone has confirmed these fears. Interest rate expectations have collapsed and the dollar has staged a spectacular rally against the euro, moving 6% in a month.    

The Bank of England's (BoE) inflation report in mid-August had a similar effect. By stating that it expected inflation to fall below its 2% target in 2011, the BoE has cleared the way for interest rate cuts, perhaps by the year-end. Analysts across the City have slashed their forecasts for growth and interest rates and the pound has slumped 7% against the dollar to the lowest levels since July 2006.

The headwinds facing the global economy are clearly reflected by cross-border flows. In developed markets the near-record inflows of two months ago have been reversed.

Over the last month flows are in the 7th percentile (higher on 93% of monthly time periods). The shift to the safety first regime foreshadowed this growth scare, just as it proved to be the tribune of the credit crunch last year.

Other flow trends have also been signalling growth concerns. Institutions began selling the materials and energy sectors ahead of the peak in the oil price in mid-July at $147. State Street Global Markets' equity strategy team moved to an underweight position in both sectors at the start of July. The retreat in the oil price to $115 has been accompanied by the falls in other commodities. July saw the worst one month decline in the Standard & Poor's GSCI index of 24 commodities since March 2003.

The inflation spike this summer marked the end of the ‘nice' decade of non-inflationary constant expansion. Some siren voices also predicted the return of a particularly nasty dose of 1970s-style stagflation.

However, credit crunches are always, ultimately, deflationary and detrimental to growth. Flows, prices and rate expectations are now reflecting this reality.

After a year investors are probably inured to the credit crunch. However, the after shocks for the real economy are still being felt. While participants in financial markets obsess over bouts of extreme volatility such as those witnessed last August, the transmission to economic data is slow but remorseless. The net result, however, can be far more destructive.

Nor are there any immediate signs of credit conditions easing. Banks are raising capital to stay solvent, rebuild their balance sheets and meet regulatory requirements, not to fund a fresh lending splurge. The latest Senior Loan Officer survey from the US Federal Reserve shows a tightening of lending standards across all loan categories, with consumers being particularly hard hit. Lending standards on prime mortgages continue to tighten, while the proportion of banks making it tougher to borrow on credit cards doubled in the past three-months to 66%, an all-time high.  

The catalysts that changed investor behaviour this August and last are different, though they share a proximate cause (the credit crunch). In 2007 the move to safety first proved to be the harbinger of a record-breaking four months of outright risk aversion with the regime map stuck in riot point.

Heraclitus would approve of the constant state of flux that characterises investor behaviour. It does not, however, necessarily bode well for markets. With the economic clouds darkening it may be that we are set for another winter of discontent.

 Michael Metcalfe is global head of macro strategy at State Street Global Markets