Global investors pulled cash from equity and from bond funds in the past week, the latter undergoing their first outflow in 11 weeks and European stocks extending a record losing streak, Bank of America Merrill Lynch (BAML) said on Friday.
While expectations of a US rate rise at the Federal Reserve’s Sept 20-21 meeting have ebbed, world stocks have retreated for two straight weeks as doubts grow about central banks’ appetite for extending multi-billion dollar stimulus programmes in the euro zone and Japan.
A rise in longer-dated bond yields has caused yield curves in Japan, the United States and Germany to steepen, rattling equity markets.
BAML said in its weekly note that “bearish sentiment signals” were evident.
So-called quant funds that rely on computer-based models for investing, could cause a sell-off of up to $52 billion in bonds and equities due to an increase in volatility and a high correlation between the asset classes, it said.
It said asset classes benefiting from zero interest rate policies had attracted $1.1 trillion since 2009, while those vulnerable to low-rate policies had taken $325 billion.
BAML’s data showed global equity funds experienced outflows of $1.1 billion in the week ending Sept. 14, their first in three weeks, with US funds shedding $1.7 billion and European funds losing $2.5 billion – their 32nd straight week of outflows.
Investors yanked $600 million from bond funds, with specialist government debt funds seeing $800 million in outflows, losing money for the 10th straight week. Junk bonds shed $3.5 billion for their first loss in six weeks.
Investment grade bonds however took in $2.6 billion while municipal debt funds pulled in cash for the 52nd straight week.
Investors’ enthusiasm for emerging markets also dimmed. Emerging equities received inflows for the 11th successive week, albeit only $700 million, while bonds took in just $100 million, the BAML data showed.
The bank noted growing interest in sectors damaged by zero-rate policies, terming them “ZIRP losers”. Japanese stocks for instance took in the largest inflows since January of $2.5 billion while high-yield bond outflows hit eight-month highs.
The Bank of Japan meets on Sept 20-21 and may act to further steepen its yield curve. BAML said the meeting was unlikely to drive a further bond sell-off but could boost bank stocks.
Banks earn money by borrowing short-term funds and lending at higher rates over the longer term, while steeper curves also help insurers and pension funds meet long-term commitments.
“The relative pain trade of long ZIRP losers, short ZIRP winners continues to gain traction,” BAML added.