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US equity funds suffered their largest redemptions since the start of the year as investors sought the safety of cash, government debt and gold as sentiment continued to sour during the first week of May.

Global equity markets have eased to their lowest level in three weeks, with the FTSE All World index having declined more than 3 per cent since April 19. With markets in Japan and Europe down sharply for the year, the S&P 500 is up less than 0.5 per cent.

Portfolios invested in US equities recorded $11.2bn of outflows in the week to May 4, accelerating redemptions from the asset class since January to more than $60bn, according to Lipper.

Sentiment has been buffered by dour earnings and guidance from companies against a backdrop of global economic uncertainty.

“All you can take away from [the flows] is that there is a chronic negative tilt,” said Jim Paulsen, chief investment strategist at Wells Capital Management. “Pessimism really didn’t get extinguished by this rally.”

Investors also continued to pull money out of equity funds for Japan, the UK and Europe, according to the latest weekly EPFR data.

European stock funds extended the longest streak of redemptions in nearly six years, with investors withdrawing $4bn from German equity funds since February.

UK stock funds suffered the biggest weekly redemption since mid-December. Japan extended its current outflow streak to six straight weeks, the longest since the third quarter of 2014.

“Among the headwinds they are facing are fears that Greece and its creditors are edging closer to another bout of brinkmanship, the recent erosion of the euro’s competitiveness versus the US dollar, questions about the strength of the German economy and the looming referendum on EU membership scheduled for the end of next month,” said Cameron Brandt, director of research at EPFR.

The brunt of the US stock outflows was felt by just two exchange traded funds: State Street’s SPDR S&P 500 ETF and Invesco’s PowerShares QQQ ETF. The two accounted for nearly four-fifths of the withdrawals, the Lipper data showed. 

US investors have turned to money market funds — often seen as a proxy for cash — adding $6.5bn in the past week. Funds invested in US Treasuries recorded $44m in new investments.

EPFR added that flows into Gold Funds accounted for nearly three-quarters of the headline number for all Commodities Sector Funds, while higher yields and stronger currencies against the US dollar continued to bolster interest in emerging markets bond funds.

Funds invested in high-yield bonds— those rated double B plus or lower by one of the major credit agencies — also suffered large redemptions. 

HYG, the largest high-yield bond ETF, counted $2.3bn of withdrawals between last Friday and Wednesday. Total assets in the fund slid below $15bn on Thursday, the lowest point since mid-February, according to Bloomberg. 

Industry participants said they believed the withdrawals were made by one or two large investors. Market makers said they had seen relatively few individual, large trades, indicating the outflow may have been one investor attempting to mask his cards by executing many small trades. 

Alternatively, the swift redemptions from ETFs could be a sign that investors are preparing to reinvest in underlying high-yield corporate bonds, as junk debt issuance rebounds from its lethargic start to the year, investors said. Roughly $33bn of high-yield debt was sold in April, lifting the year’s tally to $78bn, according to Dealogic.

BlackRock, the group behind the HYG fund, said it was difficult to decipher specifics because trading was anonymous. 

“It feels like a couple of investors. That’s my gut feeling. But there is no way of knowing for sure,” said Matthew Tucker, head of iShares fixed-income strategy with BlackRock. 

Sebastian Mercado, an ETF strategist at Deutsche Bank, said the reversal could represent a shift in sentiment on high-yield debt, which has rebounded 12 per cent from a low in February. 

“The recent outflows are driven by short-term asset allocators who entered the market tactically through the rally and are now exiting as they begin to see some headwinds,” he said.

eric.platt@ft.com

Twitter: @ericgplatt

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