In a note by BofA’s Michael Hartnett titled “When Supercycles end”, the bank looks at the latest EPFR fund flows and concludes that the wave of commodity “capitulation” revulsion selling has finally arrived.
Specifically, looking at fund flows, the most recent week saw the biggest outflow from precious metals in four months and emerging market fund outflows reaching $10 billion over the last two weeks leading Hartnett to conclude that “capitulation is beginning in EM/resources/ commodities.”
This is what the most recent flows looked like:
The fund flow details indicate a “Great Rotation” out of commodities, Emerging Markets and, curiously, the US, and into bonds and continued flows into Europe, which has now seen 10 straight weeks of inflows with the latest one of $6.0 billion also the largest in the past 4 months.
Inflows into fixed income have been across the board:
- $1.9bn inflows to IG bond funds (first inflows in 3 weeks)
- $0.5bn inflows to HY bond funds (2 straight weeks)
- $0.3bn inflows to EM debt funds (modest inflows but largest in 11 weeks)
- $2.1bn inflows to govt/tsy funds (3 straight weeks)
- $0.2bn inflows to muni bond funds (first in 7 weeks)
While in equities it has been a tale of two flow directions: out of the US and into Europe (and to a lesser extent Japan):
- Japan: first outflows in 8 weeks ($0.5bn)
- Europe: $6.0bn inflows (10 straight weeks & largest in 4 months)
- EM: $3.3bn outflows (2 straight weeks)
- US: $3.7bn outflows (outflows from both mutual funds & ETFs)
By sector, inflows to secular growth areas of healthcare ($1.3bn) & technology ($0.4bn)
To be sure, the best example of the paper flow capitulation is where else but gold, where in the past week algo, 1% of total gold/silver AUM has been wihdrawn!
But while gold has seen its share of pounding in the past 5 years, it is modest compared to the revulsion experienced by companies that have economic exposure to Emerging Markets. As BofA notes “US companies with high economic exposure to Emerging Markets at close to 13-year lows vs broad US equities.“
The last chart may also explains why Ray Dalio, after largely ignoring the bursting of China’s three bubbles (as shown here previously) finally threw in the towel, became bearish on China and admitted that “There Are No Safe Places Left To Invest.” It also explains why increasingly fewer are “buying the dip” across markets despite one-off superstars like GOOG and AMZN.