Capitulation: Record Outflows From High Yield Funds; Exodus From Europe And EMs

Unlike last week's gargantuan outflows, this week saw modest, but continuing outflows from high beta sectors and ongoing inflows into safe havens. According to the latest EPFR data, summarized by BofA, the latest week saw outflows from equities ($6.2bn ETF inflows, $6.5bn mutual fund outflows) high yield and EM debt, offset by modest inflows into Treasuries and $1.0Bn out of gold.

On a YTD basis, equities remain the biggest beneficiary of inflows, at over $103BN, however entirely in the form of ETFs, with Long Onlies suffering $37BN in redemptions. At the same time, bonds have seen over $48BN in inflows, with commodities adding a modest $3.6BN, offset by $62.6BN in money-market outflows, although the bulk of these trends were established early in the year and have since reversed.

On a geographic basis, the US saw tiny outflows following last week's massive redemptions ($0.4Bn); Both Europe (17th straight week of outflows amounting to $2.9bn) and EMs (7th straight week of outflows with $1.0bn pulled last) continue to suffer, resulting in an exodus from Europe & EM in the past 8 weeks ($24Bn & $13Bn. respectively). Japan remains the sole winner, enjoying a moderate 2nd week of inflows to the tune of $2.3Bn.

A breakdown of flows by style:

  • outflows from US growth ($1.9bn), US large cap ($1.2bn), US value ($1.6n),
  • inflows to US small cap ($0.7bn),

By sector:

  • inflows tech ($0.1bn), consumer ($0.1bn), utilities ($0.4bn), real estate ($0.5bn), materials ($29mn), healthcare ($0.3bn), financials ($0.2bn);
  • outflows from energy ($0.2bn)

BofA also reveals a startling aversion from one product which until recently was an investor favorite: HY funds have continued to record outflows (34th consecutive week). Outflows have accelerated over the past week, as last week's outflow has been the highest in 17 weeks.

Looking into the domicile breakdown, European-focused funds have recorded the largest outflows. Outflows from US and globally-focused funds were also sizable but marginally less impacted.

Summarizing these flows in the context of BofA's "Bull & Bear Indicator" which has dropped to just 2.3, BofA CIO Michael Hartnett writes that "risk appetite is much diminished", and lays out the following necessary conditions for a buy signal:

SPX <2670, 10Y Yield @ 2.6%, bigger outflows than seen this week

This, even as BofA client cash levels are back at all time lows, while allocation to equities is just below the last peak in March 2015:

(note 6% decline in US ISM new orders implies 25bps drop in 10-year UST
yields to 2.60% (Chart 3)).

Finally, based on recent economic trends, BofA believes that the next big move may be in Treasury yields, which are bound to drop even lower to catch down to the new orders series from the ISM survey.