Reuters/New York
In a crazy, volatile, often panicky week, investment flows hit long-time records in many sectors.
Initially, investors poured out of stocks and industrial commodities into money market funds, cash, US treasuries and gold, pulling out of anything that hinted of exposure to global economic risks. But by the end of the week, they were back buying stocks though whether there was commitment and conviction was unclear.
With markets swooning and soaring from one day to the next, it was hard to know which asset class would be the flavour of the moment. This was not what holiday month trading was supposed to be like.
High-frequency algo-traders racked up bigger-than-normal volumes, as they took advantage of the rapidly moving markets.
The main trends of a week in which 400-point moves saw the Dow Jones industrial average became the norm rather than the exception and interbank borrowing costs rose on fears that Europe’s debt crisis could claim new sovereign or corporate victims.
It was a week in which the US had to come to terms with last Friday’s decision by Standard & Poor’s to reduce its triple-A credit rating, a week in which there were growing fears that the US may be headed for another recession, and a week in which the eurozone’s long-term ability to survive was questioned.
Money market funds were big winners, as investors piled into an asset that traditionally offers safe, if conservative returns.
The Investment Company Institute said mutual fund assets increased by $52.78bn for the week to August 10, while fund tracker Lipper said the inflows were the biggest for a single week since February 2008.
“Ironically, money markets were really the only place to run. The inflows were really few and far between. ... taxable bond funds saw fairly significant outflows,” said Tom Roseen, senior Lipper analyst.
Equities markets were volatile all week. Stocks fell on fear that the US could lurch back into recession and on concern about the health of French banks, which are heavily exposed to some of Europe’s more indebted nations.
And then they bounced back in relief rallies and after retail sales and jobless claims data proved less dismal than had been feared.
Boston-based fund tracking company EPFR Global put net worldwide equity fund outflows at $26.1bn, the highest level since late in the second quarter of 2008, in the week ended August 10.
Lipper said investors pulled a net $14.4bn out of US domiciled equity funds in the same week. That excludes flows in the last two days of the week – the first time the market racked up two consecutive days of gains since mid-July.
More than 150mn stock options changed hands in the most volatile week on Wall Street in recent memory, according to unofficial data from clearinghouse OCC.
The week included an all-time one-day record of 41.5mn contracts traded on Monday and surpassed last week’s 145mn contracts. Before August, trading of stock options had averaged about 17.8mn contracts a day.
Big speculators slashed their bullish bets in US commodity markets by a massive $21bn in the week to August 9, selling heavily into a major gold rally and cutting total positions to the lowest in a year.
Excluding some $6bn of profit-taking in the US gold futures and options market, so-called “managed money” funds cut their overall net long holdings in 21 other markets by nearly $15bn, the third-largest one-week sell-off since the data series begins at the start of 2010.
Reuters calculations are based on Commodity Futures Trading Commission’s weekly Commitment of Traders report, and they capture most of the recent rout in global risk assets, the biggest sell-off by some measures since the 2008 crisis.
EPFR Global said commodity funds took in a net $404mn for the week.
“As before, flows into funds specializing in gold and precious metals - which have taken in over $9bn since the beginning of July - offset outflows from funds dealing with industrial commodities as hopes for growth in the second half of the year continue to plummet,” EPFR said.
The general risk aversion resulted in the biggest net outflow for high-yield funds – $6.71bn – since EPFR started tracking the sector in the second quarter of 2005.
A record $10.4bn flowed out of global bond funds in the week to August 10
But overall US bond funds suffered net outflows of just $1.5bn, as money flowed into safe havens like US Treasuries despite the S&P downgrade.
European bond funds saw net outflows of $1.13bn, as Europe’s sovereign debt crisis threatened to spread.
A Federal Reserve promise to keep interest rates near zero until at least 2013 prompted $1.36bn in net outflows from floating rate note funds, the most since EPFR started tracking the sector in the first quarter of 2007.
Growth prospects are generally better in emerging markets than in the industrialized countries at the center of the latest market storm, but even they performed poorly.
EPFR data showed emerging market debt funds had $607mn in net outflows. Hard currency bond net outflows were $459mn. But local currency-denominated emerging market bond funds took in a net $108mn.
Barclays Capital said that was a little surprising given that emerging market currencies fell 2% against the US dollar during the week.
Emerging market equity funds had a net $7bn pulled out, the most since the third week of 2008, EPFR said.
Dedicated long-only emerging market equity funds had net outflows of $7.76bn while the broader global emerging market funds saw $3.24bn in net outflows.
Latin America had outflows of $692mn. Russia had net outflows of $412mn, its worst week since June 2006.
Hong Kong focused equity funds had net outflows of $352mn, representing 6% of assets under management.
High-frequency traders’ using algorithm-triggered computers have been pouncing since late July as spreads and volatility rose.
High-frequency trading represented 65% of total US equity volume in the first 11 days of August, up from 53% in January-July, according to the Tabb Group. Computer-based trading peaked on Wednesday, the day of the Dow’s second big fall of the week, at 70%.
“As spreads and volatility increase, there’s a greater need for the intermediaries and market-makers that make up the HFT community,” said Larry Tabb, CEO of the consulting firm. “There’s a lot more activity on the quoting side and a lot more activity on the trading side.”
Tabb agreed with traders at broker-dealers that the volatility is creating a temporary boom in commissions across the securities industry.
Of the 12 IPOs expected to come to market this week, only two – SandRidge Permian Trust and Carbonite – actually priced and began trading. Oil and gas royalty trust SandRidge Permian Trust raised $540mn, 14% less than expected, and closed almost flat with its $18 IPO price.
Web-based computer backup company Carbonite closed its first day of trading up 23.5% and ended up 30% at the end of the week. It had priced at the bottom of a lowered range and raised 38% less than planned.
The other 10 IPOs that were scheduled were postponed due to the volatile market that came right ahead of the traditional Wall Street August holiday.
While about a week’s worth of deals were pulled, the market turmoil may not have as much of an impact as it would if it came at a different time, some experts said.