Biggest US Equity Outflows Since Brexit; US Banks Hit The Hardest

The latest evidence that rumors of Trumpflation trade's death are not greatly exagerated came overnight from Bank of America which reported that based equity funds saw net outflows of $8.9 billion, the largest in 38 weeks. The most impacted sector was, not surprisingly, banks - the biggest beneficiary of the post-Trump election victory rally, which suffered the biggest outflows in over a year.

Where was the withdrawn money paked? The usual place: bonds. According to Lipper, U.S.-based taxable bond funds absorbed $8.3 billion in cash during the week ended March 22, the most in eight months, while investors withdrew $1.3 billion from financial sector funds in the worst week of net sales for those funds since July 2015, Lipper said.

As Reuters notes, in both cases, the latest week's results are an about-face from the popular trades that followed U.S. President Donald Trump's election victory in November and come as investors questioned whether the new U.S. administration can soon deliver the fiscal and regulatory changes needed to support the "Trump trade" of higher equity prices and rising bond yields. The bearish-bond and bullish-bank trades have both diminished since November, and on Tuesday investors delivered a body blow to U.S. stocks and fled to safe-haven bonds. The S&P 500 and Dow Jones Industrial Average indexes lost over 1 percent that day in their worst one-day performances since before Trump's election victory.

"As investors have become more skeptical or wary of the ability of the president to drive through his policy agenda that's started to have negative impact on some of the areas in the U.S. which had benefited from that hope," said Richard Turnill, BlackRock Inc's global chief investment strategist.

While investors fled the US, they remain optimistic on EMs and Europe: while overall stock funds posted $1 billion in net withdrawals, the first week of outflows since January, equity funds invested abroad attracted $3.8 billion in the largest haul since December 2015. Emerging markets stock funds attracted $2.2 billion in their best week since August 2016 according to Lipper, while European stock funds gathered $636 million in their best week since December 2015. Japanese stock funds posted $593 million in withdrawals, their largest outflows since last July.

More details from the BofA report, broken down by region (EPFR not Lipper):

  • Europe equity funds see outflows of $0.8BN
  • Emerging markets equity funds see inflows of $2.8BN
  • Japanese stocks see inflows of $2.5BN

By investment style:

  • largest redemptions from U.S. value funds in 66 weeks,
  • largest outflows from U.S. small caps in 24 weeks

By sector:

  • inflows to materials, utilities, tech, energy, real estate; outflows from financials, consumer, health-care
  • In fixed income, bonds see inflows of $7.8b, with inflows in 12 of past 13 weeks
  • IG bond funds see inflows of $5.7b; HY bond funds see outflows of $1.3b; EM debt funds see inflows of $2.7b

On the FICC side, the biggest winners continue to be EM debt and gold and silver, while Junk bonds remain the most impacted.

Finally, some more insight from Michael Hartnett:

Risk-off week for flows

  • $7.8bn inflows to bonds, $1.1bn inflows to gold (largest in 5 weeks), $1.1bn outflows from equities.

The TARP moment

  • Failure of AHCA (American Health Care Act) is unlikely to cause a "TARP moment" (GT30 -25bps, SPX -9% on Sept 29th 2008), but could cause final flush in "reflation trades", especially given CTA positioning.

Where's the Beef?

  • In our view, the Trump trade was always going to have a "where's the beef?" moment. Hard data recovery and renewed optimism on tax reform (only 10% think passage by Aug) catalysts to inspire final capitulation into risk assets spring/summer. Reflation trades will likely rally again. We continue to believe the Big Top happens Q3 at earliest.

New theme: synchronized monetary tightening

  • Synchronized global recovery past 2-3 quarters now being followed by synchronized central bank tightening next 2-3 quarters…end of excess liquidity is the major reason we think markets are likely to enter a major "topping process" in 2017.

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