The Great Rotation Ends: Largest US Equity Outflows In 4 Months; Biggest Treasury Inflows Since July

While the S&P500 market may remain pinned just why of all time highs, this appears to be from ongoing short covering, and is not - at least in the latest week - the result of new money entering the market. Quite the opposite: according to the latest BofA fund flow analysis based on EPFR data, in the latest week, US equities saw $6.3 billion in outflows, the largest weekly redemption from US mutual funds and ETFs in four months, since before the presidential election. And as investors pulled cash out of US stocks, they quickly reallocated it back into bonds, with all major classes seeing inflows, with notable mentions for government bonds, which had the biggest inflows since July 2016, and TIPS, where the demand for inflation protection is now the highest since the great China reflation scare of 2011 (it proved quite transitory).

Here are the details from BofA:

Bottom-line: investors continue to position for reflation via TIPS over munis, HY over gold & Japan over US equities; but the re-positioning feels grudging and flows have yet to show big asset allocation capitulation out of bonds into stocks

The first week of Trump: flows show largest weekly bond fund inflows in 4 months ($8.6bn), tiny equity fund inflows ($0.2bn) and precious metal outflows ($0.2bn) On bonds: inflows to HY bond funds in 8 of past 9 weeks; inflows to bank loan funds in 25 of past 26 weeks; inflows to TIPS in 31 of past 33 weeks (Chart below)…all reveal relentless bid for yield & inflation-protection; but note this week’s govt bond fund inflows were biggest since Jul’16

On equities: largest EM equity fund inflows in 3 months ($1.0bn); largest 3-week inflows to Japan equity funds in 16 months ($8.8bn); inflows to materials funds in 11 of past 12 weeks = clear bias towards reflation/inflation BofAML GWIM ETFs: last week our private clients added to risk (bank loans, financials & HY) & inflation plays (precious metals, TIPS) and sold down defensive/yield-plays (lowvol, dividend-income, munis, REITs & staples)

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Asset Class Flows

  • Equities: tiny $0.2bn inflows ($5.5bn mutual fund outflows vs $5.6bn ETF inflows)
  • Bonds: $8.6bn inflows (largest in 4 months) (5 straight weeks)
  • Precious metals: $0.2bn outflows (outflows in 10 of past 11 weeks)

Fixed Income Flows (Chart 2)

  • Inflows to HY bond funds in 8 of past 9 weeks ($1.5bn)
  • 5 straight weeks of IG bond inflows ($3.6bn)
  • 11 straight weeks of inflows to bank loan funds ($1.1bn)
  • 7 straight weeks of inflows to TIPS funds ($0.5bn)
  • First outflows from EM debt funds in 4 weeks ($0.4bn)
  • Largest govt bond fund inflows since Jul’16 ($1.4bn)

Equity Flows

Japan: strong $3.1bn inflows (inflows in 4 of past 5 weeks)

EM: $1.0bn inflows (largest in 3 months)

Europe: small $0.2bn inflows

US: $6.3bn outflows (largest in 4 months)

By sector: largest healthcare outflows ($1.0bn) from healthcare in 10 months (outflows in 8 of past 9 weeks); largest tech inflows in 14 months ($1.0bn); inflows to materials in 11 of past 12 weeks ($0.6bn)