European funds saw massive inflows this week as investors are climbing over each other to get a hold of stocks and bonds — both government and corporate — in the eurozone.
It was the biggest week on record, according to Bank of America Merrill Lynch analysts. Greece’s debt drama doesn’t seem to be worrying many, and Mario Draghi’s surprisingly large quantitative easing programme announced at the end of January has spurred huge interest.
You can easily see here how gargantuan the effect was in the chart below:
There are now a bundle of signs of a modest recovery in Europe. Retail sales rose at the fastest pace in eight years in December, business surveys are in an upswing, and private lending is back in positive territory for the first time in two and a half years.
What matters here isn’t the overall state of the European economy. There’s no doubt that’s still poor: Unemployment is high, growth is likely to be slow and there are still a bunch of problems with the whole set-up of the eurozone. What matters is the direction.
In the last few weeks, that direction has suddenly changed.
Markets are always as forward-looking as they can be, and expected future performance gets priced into assets like stocks (as much as is possible). The recovery in US stocks from mid-2009 onwards wasn’t because the economy was amazing: It was because investors bet the moderate upturn would continue, and that the Fed would keep intervening if necessary. That may be what the ECB finally signalled at the end of January.
Pretty much every asset class is enjoying the surge. Here’s how BAML’s analysts broke it down:
- In the week to 4 February, bond funds netted $US21 billion.
- Money-market inflows were the 4th highest ever.
- European equity inflows were the 6th biggest ever.
- Inflows into government bond funds were the 3rd largest ever.
- Inflows into all fixed-income funds were the 2nd biggest ever.
- High-grade credit flows were the 8th largest, since data began
All in all, aggregate risk-on flows in to European assets were huge: almost $US40bn!
As BAML puts it, European stocks are now “no longer contrarian: Significant outflows at the end of 2014 have reversed rapidly.”
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