"Violent Rotations" - Record Equity ETF Inflows, Record EM Debt Outflows... And It's Just Beginning

Tyler Durden's picture

Over the weekend, we reported that as a result of the Trump victory, the market underwent some truly staggering asset rotations and fund flows, leading to trillions in gains (for equities) and losses (for credit). Today, after the latest Lipper and EPFR fund flow data, we can say that the unprecedented fund flows have continued with numerous records being made out across the board.

According to Lipper data, in the week ended November 16, investors flooded $23.6 billion in new cash on U.S.-based stock funds over the latest week, the most in nearly two years and the third-largest haul for those funds on record. This number consisted of a record $27 billion inflow into equity ETFs, suggesting that even during moments of peak euphoria, active managers are unable to get funding: US-based equity mutual funds posted yet another $3.4 billion in outflows in the past week.

Meanwhile, as expected, US-based taxable bond funds saw substantial outflows, amounting to $5.9 billion in the 3rd straight week of outflows between mutual funds and ETFs. And don't even bring up Emerging Market bonds: those just saw record outflows.

This means that after years of predictions of a Great Rotation from stocks to bonds, it finally took place... but if you blinked too long, you missed it.  Indeed, as The Long View twitter account puts it, "the democratization of investing has risks. Hot money creates skew as bigger crowds rush through illiquid exits en masse." Well, this week they were rushing out of anything rates related and flooding into equity linked products.

For a different perspective, this time through the eyes of EPFR, we go to Bank of America's Michael Hartnett who summarizes that week's events with two words: "Violent rotation", and goes on to list why:

Record inflows to equity ETFs, record inflows to financial sector funds, biggest bond redemptions in 3½ years, record redemptions from EM debt.

“Great Rotation” flows: largest equity inflows in 2 years ($28bn), biggest bond outflows in 3½ years ($18bn); widest weekly disparity between stock & bond flows ever.

Trading a secular inflection point: if BREXIT marked 5,000 year low in global interest rates, Trump marked moment investors started to position for bond bear market; note yields can rise quickly…price action always violently big at secular inflection points as overshoots corrected quickly (e.g. Jul’80-Oct’81 US bond yields surged from 10% in 16%; by Oct’82 yields back at 10%).

Bond vs Equity flows: past decade $1.5tn inflows to global bond funds vs $0 for global equity funds (Chart 4); mutual fund flows (excluding ETFs) show extreme divergence of $1.1tn bond inflows vs $1.3tn equity outflows (Chart 5).

Bond bloodbath: this week largest EM debt redemptions on record (Chart 2); largest muni bond outflows in 3½ years; largest Treasury outflows in 12 months. Dollar pain trades: surge in DXY>100 causes largest precious metals outflows in 3½ years & largest EM equity outflows in 14 months.

Inflation rotation: record financials inflows (monster $7.2bn – Chart 1); largest materials inflows in three years; 23rd week of TIPS inflows ($0.8bn); inflows to bank loan funds 18 of past 20 weeks.

Passive smashing active: note astounding contrast this week between record inflow to equity ETFs ($34bn) & 37th straight week of equity mutual fund outflows; since 2002, $2.1tn inflows to “passive” funds vs $1.8tn outflows from “active” funds (Chart 3).

Violence vs peace: what could temporarily arrest Nov stampede out of bonds...weak data…1st post-Trump data was strong weekly initial unemployment claims & poor weekly mortgage applications… numbers next week represent 1st “clean” post-election  data…mortgage apps more imp for us…2nd consecutive weak mortgage applications reading (30-year mortgage rates up 40bps to 3.94% since  election) needed to calm bond markets (data released 23rd).

Some more details on what has been a truly historic week:

Asset Class Flows

  • Equities: largest inflows in 2 years ($27.5bn) ($34bn inflows to ETFs offset by $7bn outflows from mutual funds)
  • Bonds: largest outflows since Jun’13 ($18.1bn)
  • Precious metals: largest outflows since Jun’13 ($2.7bn)

Fixed Income Flows:

  • Record outflows from EM debt funds ($6.6bn)
  • Largest outflows from muni bond funds since Jun’13 ($3.0bn)
  • Largest outflows from Govt/Tsy funds in 12 months ($3.4bn)
  • Chunky $3.8bn outflows from HY bond funds (3 straight weeks)
  • $2.4bn outflows from IG bond funds
  • 23 straight weeks of TIPS inflows ($0.8bn)
  • Inflows to bank loan funds in 18 of past 20 weeks ($0.6bn)

Equity Flows 

  • EM: largest weekly outflows in 14 months ($5.4bn)
  • US: largest weekly inflows in 2 years ($30.7bn)
  • Europe: rare $0.8bn inflows (largest in 9 months)
  • Japan: $1.0bn outflows (outflows in 3 of past 4 weeks)
  • By sector: monster inflows to financials ($7.2bn) & healthcare ($3.1bn); largest materials inflows in 3 years ($1.4bn); 7 straight weeks of consumer outflows ($0.8bn)

* * *

And keep in mind this is just one week after the election results: the flow party is just getting started.

Traditionally, during such times of violent rotations, numerous hedge funds don't survive simply because they get caught up in the margin calls, are unable to sell at modeled prices and fail to reposition fast enough. We should know the names of the first casualties within days.

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Stormtrooper's picture

If "fiat money" had any true value like gold does, we wouldn't be seeing this kind of market games.  It would be fundamental and value based investing.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Stormtrooper Nov 17, 2016 11:02 PM

Coulda, woulda, shoulda. So what?

Yen Cross's picture

  This move in F/X makes it so blantantly obvious the Fed. is going to do another round of QE. The banksters are all playing nice because ,"after all" $usd is the universal funding currency.

  Next week is only three days [trading $usd markets] and there's lot's of macro. This shit show is getting outright obscene, and dealers have to be worried with all the stops they've taken out in the majors.

  I seriously think there's a concerted CB play in F/X right now. [ these moves aren't just speculation, model funds, CTA, Pension Funds ,ect---]

  It's a setup for easing, in my humble opinion.

cat2005's picture

How is it a setup for easing?

Yen Cross's picture

   When the Fed. decides to increase the $money supply, they'll want the $usd strong, so that the BoJ and ECB remain export competitive as the $usd sells off , due to additional $usd  supply and lower bond yields.

 Additionally, it will cause currency and bond issues in EM.

asteroids's picture

BINGO. The FED and the other CB's have been released by the election to do whatever they want. One mis-step by these assholes and disaster.

Citizen_x's picture

 

Interesting and logical.  The catalyst to break through SPX/COMP over head resistance.  And yen futures are at their golden cross on a weekly chart.

katagorikal's picture

QE4 is needed to mop up the flood of USTs coming to market:

  • Sales by China and EMs as they repay USD interest/principal on offshore loans, 
    all while trying to maintain local currency fx rates, such as USDCNY.
  • Sales by oil exporters as they fund domestic expenditure and also maintain currency pegs to USD.
  • New debt to fund $300bn deficit in the last 45 days, and another $300bn before year end.
  • Plus all the additional fiscal expansion proposed by Trump for next year.

The timing will be interesting. I'm not sure what bond yields will trigger action, because US debt has quite long average duration these days, so the impact of higher yields builds gradually as debt rolls over. My guess is sometime after the inauguration during Q1 next year, but things could get out of hand more quickly.

gm_general's picture

Aren't record inflows a contrarian indicator?

Yen Cross's picture

   The markets tend to over react to macro factors. What you're seeing now is pure unadulterated greed.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Yen Cross Nov 17, 2016 11:05 PM

Not necessarily. Would you be dumping any local currency into the Indian stock market? How about the South African stock market? Or, this is juicy, why not go all in on the Venezualan stock market! It isn't hard to understand why emerging markets are fleeing and dumping money into the US stock market.

Yen Cross's picture

    I'm not seeing your point?  Do you even know what a local currency is?

   Asian and EM currencies aren't local to the euro, aud, gbp, jpy, currently being dumped into $usd equities.

 It kinda seems to me, that you've answered your own question?

  EM's fund their transactions with $usd so it actually creates a demand/funding shortage for those places as borrowing costs rise.

 

Ajax_USB_Port_Repair_Service_'s picture

Talk about shorted out, discombobulated, disorientated markets! Junior Kimbrough is the blues man that exemplifies this phenomenon. Flat out crazy. No rules! R.I.P. Junior Kimbrough. "Y'all stay with me till I come down."

https://www.youtube.com/watch?v=SCKYbyYDP9I

Ajax_USB_Port_Repair_Service_'s picture

All I know is, my favorite volatile gold stock will be back to "buy" territory tomorrow morning.

Pump/Dump/Pump/Dump.  The cycle continues! BAA

highwaytoserfdom's picture

 

 

http://www.bloomberg.com/news/articles/2016-09-14/blackrock-sides-with-b...

Never forget Fink of blackrock started MBS while at  State street..  

ETF buying is BOJ?     The financials are stunning couldn't make money at lower rates so higher rates is the ticket.  

ABE meeting with Trump. India trying to clamp down on gold?      You tell me what is going on.    There is no way liquidity doesn't hit the wall...     Take top 5 banks and give em the old Japan bubble treatment.

Boy the terror attack by AlanBenFelon  is creating quit a show.   History shows the only solution is war... but you would have to be a pretty dumb Hessian to do this at this point.

 

pitz's picture

Buying financials makes zero sense here given that they're going to be decimated with the higher long-term rate environment.

katchum's picture

That's only when the fed's fund rate keeps up with those higher rates.

gdpetti's picture

Not to worry with the next 'bank holiday' soon approaching.... a sinking tide sinks all boats equally....if your at sea.

Maestro Maestro's picture

More lies on what is fast becoming a fifth column website disseminating false and misleading information.

The Western bankers and Western governments NEVER could have smashed the gold price without the collusion of the Indian, Chinese, Russian and Islamic Arab governments and central banks. If the Indian, Arab, Chinese and the Russian ruling classes were not in cahoots with the Americans and the Europeans, they simply would have bought physical gold and silver each time their prices were smashed in the paper markets, exchanging their Dollars and Euros for PMs, ridding themselves of (undefined therefore fraudulent) debt notes issued by bankrupt Americans and Europeans.

We have seen the enemy and it's our respective governments - elected and/or supported by you and I.

As below, so above.