Posted by on February 10, 2017 3:03 pm
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Categories: B+ Bond Business Corporate bond economics Economy fixed Fund Flows Inventory japan Nationalism Precious Metals REITs S&P Stock and flow Systems theory

A curious dichotomy has emerged in global fund flows.

According to the latest flow report from BofA’s Michael Hartnett, “it’s risk-on in Bonds, it’s inflation-on in Stocks, and EM is now playing role of cyclical catch-up trade.” In short, in the last week the Trump Trade has emerged from the dormancy in which it had faded for the past month.

But when one looks at where the money is flowing, it is going everywhere except where one would expect, as US stocks continue to be shunned, based on EPFR data.

Here are the details.

  • First in bonds, there has been a dip in bond yields which has incited big buying of IG bonds ($7.6bn…biggest since Aug’16), HY bonds ($1.9bn…note price-action in corporate bond markets remains resolutely “risk-on” as cross-asset signal – Chart 1), renewed interest in EM debt (inflows 5 of past 6 weeks), and 9th consecutive week of inflows to TIPS ($1bn…biggest week for TIPS since Trump election); in contrast, dip in Treasury yields coincides with largest outflows from Treasury funds YTD.
  • Then, in stocks there has been inflows to equity funds investing in value, Europe, Japan (like TIPS, largest week of inflows for Japan since election), materials, and financials;
  • Paradoxically, Emerging Markets have also gained as a Trump’s “economic nationalism” had, at least until yesterday, proben to be dollar-negative not dollar-positive (biggest hit to consensus positions YTD), which has has made EM the contrarian Q1 winner…EM stocks and bonds have seen $11bn inflows YTD as investors start chasing this cyclical laggard. This trend may reverse however now that the dollar has resumed its grind higher.

Yet despite the latest weekly euphoria, BofA finds outflows from equity funds investing in US stocks, amounting to another $1.6 billion across ETFs and mutual funds, the 4th week of outflows in the past five. Among the sectors shunned are growth, telcos, consumer sector; i.e. redemption from “deflation assets”, inflows to “inflation assets.”

Still, despite this ongoing outflow from the US, the S&P continues to levitate to ever higher all time highs, making one wonder once again, if the latest record push is more a function of short covering (something we saw vividly earlier this week), and/or stock buybacks.

Some more grandular details:

Asset Class Flows

  • Bonds: 7 straight weeks of inflows ($13.3bn)
  • Equities: 6 straight weeks of inflows ($6.3bn) ($7.8bn ETF inflows vs $1.4bn mutual fund outflows)
  • Precious metals: $1.9bn inflows (inflows in 3 of past 4 weeks)
  • Money-markets: $10.2bn outflows

Fixed Income Flows

  • Inflows to HY bond funds in 10 of past 11 weeks ($1.9bn)
  • Inflows to EM debt funds in 5 of past 6 weeks ($2.5bn)
  • 7 straight weeks of IG bond inflows ($7.6bn)
  • 13 straight weeks of inflows to bank loan funds ($1.2bn)
  • 9 straight weeks of inflows to TIPS funds ($1.0bn)
  • $0.9bn outflows from govt/tsy funds

Equity Flows

  • EM: 5 straight weeks of inflows ($1.0bn)
  • Japan: 5 straight weeks of inflows ($3.4bn)
  • Europe: small $0.1bn inflows (3 straight weeks)
  • US: $1.6bn outflows (outflows in 4 of past 5 weeks)

By sector: $1.9bn inflows to US value funds vs $1.0bn outflows from US growth funds; 4 straight weeks of outflows from REITs ($0.4bn); inflows to materials in 13 of past 14 weeks ($2.4bn); inflows to energy in 9 of past 10 weeks ($0.4bn)

* * *

Hartnett then rhetorically asks again, as he did earlier in the week, if it is time to sell and answers: 

“No. We remain bullish risk assets: Feb 10th marks one-year anniversary of lows in oil $26/bbl, SPX 1810, inflation expectations, and highs in VIX 30 and HY spreads 900bps; catalysts for furious 12-month rally = Positioning, Profits, Policy; our Positioning gauge up from 0 to 6.1, our Profit proxy up from 1.5 to 6., but neither at euphoric levels. And Policy (easy global money & Trump fiscal stimulus) remains risk-friendly H1.

Finally, as we head into this one last hurrah for stocks, here are BofA’s “Icarus trade targets”:

  • SPX 2500,
  • oil $70/b,
  • GT30 3.5%,
  • DXY 100;

With every passing day, these targets look less and less ridiculous.

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