U.S. FundFlows Insight Report: Fed Bypasses A September Rate Hike; Fund Investors Embrace Bonds

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Includes: DBEF, DIA, QQQ, SPY, XLE
by: Lipper Alpha Insight

By Tom Roseen
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Despite trepidation regarding the upcoming FOMC two-day policy meeting, investors began the fund-flows week ended September 21, 2016, on a more committed note after learning that August retail sales declined for the first month in five and that weekly jobless claims rose slightly to 260,000. For many these events lowered the likelihood of the Fed's hiking its key lending rate at its September meeting. While an Apple-inspired rally after the release of its new iPhone helped push the NASDAQ to new intraday highs, the uncertainty about what the Fed was going to do pressured financial issues, and a decline in oil prices weighed on energy stocks as traders expected an increase in oil exports from Libya and Nigeria.

Skittishness ahead of both Japan's and the U.S.'s central bank policy meetings hindered investor exuberance as they learned that home builder confidence rose in September to its highest reading in ten years. Instead, investors took a cautious approach, awaiting the policy announcements by both central banks on Wednesday, September 21. With many pundits ruling out a September rate increase in the U.S., the dollar began to weaken, strengthening the price of both oil and gold. Oil strengthened additionally on the news that military conflicts in Libya had impacted the country's crude oil exports and that Venezuelan President Nicolas Maduro had said the OPEC and non-OPEC nations were close to an agreement to cap oil output. On Wednesday stocks rallied after the Fed announced its intention to keep interest rates unchanged. Also, the BOJ introduced a new monetary policy keeping its deposit rate at negative 0.1%, but it added a yield curve control policy, which is supposed to create a steeper yield curve that should motivate banks to lend. At the end of the flows week the NASDAQ hit an all-time closing high after rising oil prices also lifted investor sentiment, as the dollar continued to weaken, and with the American Petroleum Institute's reporting a weekly decline in crude supplies.

For the third week in a row fund investors were net redeemers of fund assets (including those of conventional funds and exchange-traded funds [ETFs]), withdrawing a net $15.0 billion for the fund-flows week. Investors padded the coffers of taxable bond funds (+$5.0 billion) and municipal bond funds (+$0.5 billion), but they were net redeemers of money market funds (-$17.1 billion) and equity funds (-$3.4 billion).

For the second consecutive week equity ETFs witnessed net outflows, handing back $1.4 billion for the flows week. Authorized participants (APs) were net purchasers of domestic equity ETFs (but only to the tune of +$0.4 billion), injecting money into the group for the third week in four. Meanwhile, for the third week in four nondomestic equity ETFs witnessed net redemptions, this past week handing back $1.8 billion. The PowerShares QQQ Trust ETF (NASDAQ:QQQ) (+$1.4 billion), the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) (+$0.8 billion), and the Energy Select Sector SPDR ETF (NYSEARCA:XLE) (+$0.6 million) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) (-$4.1 billion) experienced the largest net redemptions, and the Deutsche X-Trackers MSCI EAFE Hedged Equity ETF (NYSEARCA:DBEF) (-$0.7 billion) suffered the second largest net redemptions for the week.

For the twenty-eighth week running conventional fund (ex-ETF) investors were net redeemers of equity funds, redeeming $2.1 billion from the group (despite its posting a positive return of 1.94%). Domestic equity funds, handing back a little more than $2.7 billion, witnessed their thirty-third consecutive week of net outflows and posted a weekly performance decline of 1.90%. Meanwhile, their nondomestic equity fund counterparts, posting a 2.04% return for the week, witnessed net inflows (+$0.7 billion) for the first week in 13. On the domestic side investors lightened up on large-cap funds, redeeming a net $2.2 billion. On the nondomestic side global equity funds witnessed $0.7 billion of net inflows.

For the second week in three taxable bond funds (ex-ETFs) witnessed net inflows, taking in a little over $2.2 billion. Balanced funds witnessed the largest net inflows of the group, taking in $1.1 billion, while international & global debt funds and corporate investment-grade debt funds attracted some $0.8 billion and $0.5 billion, respectively. Corporate high-yield funds suffered the largest net outflows, handing back $259 million of net redemptions, bettered by government/Treasury & mortgage funds (-$57 million). Despite Fed officials bypassing a rate hike in September, bank loan funds witnessed their third week of net inflows, attracting some $191 million for the week. Staying on their recent winning streak, for the fifty-first consecutive week municipal bond funds (ex-ETFs) witnessed net inflows, attracting some $0.4 billion this past week.