The United States was the only global region to enjoy investment inflows this week, with $5.1 billion pumped into U.S. stock funds while the same amount flooded out of emerging markets, Bank of America Merrill Lynch (BAML) strategists said on Friday.
Investors pulled $2.7 billion out of European equities and $1.9 billion out of Japan in a broad withdrawal from assets perceived as risky, which saw $12.9 billion flowing out of global equities and $5.9 out of bond funds.
It was the seventh straight week of inflows for U.S. equities, which have benefited from their heavy weighting in big tech stocks and strong economic data.
The dollar's rise on this economic strength has bruised emerging markets (EM), which had their biggest weekly outflows since November 2016 as investors shed EM assets.
The risk-off moves sent BAML's "bull and bear" indicator - a measure of investors' appetite for risk - down to 2.9, its lowest since the Brexit vote two years ago and edging closer to a contrarian "buy" signal.
Triggers for a drop to that level could include further outflows from risk assets, the S&P 500 falling below 2,650 points, or weak June U.S. payroll figures, which may nudge the Federal Reserve to cut its forecast for two more interest rate hikes this year.
FINANCIALS FLOUNDER, TECH STAYS TERRIFIC
In a week of new highs for the tech-heavy Nasdaq, investors kept buying tech stocks, putting the sector on course for a record annualized inflow of $37 billion.
"Tech an oasis," said BAML strategists, adding the sector seemed so far "immune to summer macro and market woes" and was an anomaly.
Analysts have been trying to explain the tech sector's astonishing outperformance and resilience to concerns from trade to monetary tightening.
Besides the conviction among many investors that the tech revolution is a secular trend, the sector also has a relatively light debt burden which makes it more resilient to rising interest rates.
Meanwhile, investors shed financial stocks at a rate not seen since September 2016.
Some $1.4 billion flowed out of financials as investors priced in a negative impact from rising protectionism and adjusted their interest rate expectations after more dovish than expected comments from the European Central Bank.
'QUANTITATIVE TIGHTENING' DRIVES TRANSATLANTIC DIVERGENCE
The U.S. Treasury-Bund spread hit its widest since 1989 as a result of the diverging outlooks for rates from the Fed and ECB last week.
In credit, high-yield bond funds had their seventh consecutive week of outflows, while investment-grade bonds had their biggest outflows since December 2016. EM debt funds had their 9th straight week of outflows, losing $1.7 billion.
BAML pinned these moves to the cycle the market is entering as global central banks tackle the mammoth task of gradually turning off the taps of post-crisis quantitative easing (QE)monetary stimulus.
The strategists noted "QE winners" including EM debt, high-yield and investment-grade credit are suffering, while "QE losers" such as volatility, cash, commodities and the U.S. dollar are outperforming.
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