Investors Pull $30b From US Stock Funds

Investors are fleeing US stocks in a way they haven't since 2004. For 10 straight weeks a total of $30 billion has left US stocks, marking the longest streak of outflows since 2004, Bank of America Merrill Lynch said in a report, citing EPFR Global data.

Investors turned instead to emerging markets and European and Japanese stocks, which saw $36 billion in inflows over the last 10 weeks, the report said, CNBC reported.

BofAML's breakdown of last week's fund flows pointed to more aversion to risk among investors, and could add to some analysts' worries about deteriorating market internals.

The 10-week outflow from US stocks comes despite the S&P 500's nearly 1% gain this quarter and a record high on Aug. 8.

The report also pointed out the turn away from US stocks coincided with the late June surge in the euro against the US dollar to its strongest in nearly a year, after comments from European Central Bank President Mario Draghi suggested higher inflation and tighter monetary policy soon in the eurozone.

In the week ended Wednesday, European stocks saw their first outflows in seven weeks, the BofAML report said, while Japanese stocks saw their largest inflow in five months at $3.1 billion.

Major contributors to US stock market gains in the last several months saw significant outflows in the week ended Wednesday, the BofAML report said:

Technology—$600 million, largest in 49 weeks.

Financials—$35 million, second straight week.

Consumer—$1.5 billion, third largest ever.

The defensive utilities sector was the only US stock sector to see slight inflows in the last week.

Withdrawals

By investing style, investors withdrew $1.6 billion from US growth stock funds and $1.1 billion from US value stock funds, the BofAML report said. Only US small caps saw inflows, at $700 million.

Investors also piled into treasury bonds, which saw their greatest inflows in 10 weeks at $900 billion. But riskier high-yield debt posted $2.2 billion in outflows, its eighth week out of 10 of withdrawals, the report said.

That said, analysts don't expect the defensive turn to result in a large market downturn.

"This is definitely weaker US equity inflows but still net positive and my sense is that positioning is still long and the VIX back at 11 shows there is still complacency," Ilya Feygin, managing director and senior strategist at WallachBeth Capital, said Friday. He estimated US stock exchange-traded funds, passive investment products which have risen in popularity over mutual funds, gained $6.1 billion in net inflows since June 30.

In addition, BofAML said its proprietary Bull & Bear indicator did not trigger a "sell" signal, meaning the market still remains in a rally mode.

And while overall the bank's wealthy private clients turned more defensive, their allocation to one traditional safe haven, precious metals ETFs, has fallen to record lows, BofAML said.

Forex and Fixed Income

The euro rose as high as $1.194 following Draghi’s speech, before easing back to $1.1919—still up 1% on the day. For the week, the single currency was 1.3% higher. Meanwhile, the dollar maintained its post-Yellen losses against the yen and sterling.

The US currency was down 0.3% on the day versus the yen at ¥109.23, while the pound was up 0.7% at $1.2883.

US Treasuries mostly edged higher in the wake of Federal Reserve Chair Janet Yellen’s comments at the central bank’s annual symposium in Jackson Hole, Wyoming, on Friday. The yield on the 10-year note, which moves inversely to its price, was down 3 basis points at 2.17%, although the more policy-sensitive two-year note was up 1bp at 1.34%. The 10-year yield ended the previous week at 2.19%.

Yellen emphatically defended the web of regulations the Fed helped enact after the 2008 financial crisis, saying it helped restore the banking system's health and disputing criticism that the rules have hurt lending. She said the Fed is prepared to adjust the regulations as needed to help financial institutions.

At Wall Street, the S&P 500 equity index climbed as high as 2,453.96 following the publication of Yellen’s prepared remarks, but slipped back to 2,443 by the close of trade in New York, up 0.2% on the day. For the week, the index was 0.7% higher, snapping a two-week losing streak.

European stocks struggled to hold Friday’s early gains. The Stoxx 600—up 0.5% at one stage, ended the session 0.1% lower. The pan-regional index was fractionally lower for the week.