In a wild week in the markets: How the money flowed

NEW YORK Fri Aug 12, 2011 7:09pm EDT

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NEW YORK (Reuters) - In a crazy, volatile, often panicky week, investment flows hit longtime records in many sectors.

Initially, investors poured out of stocks and industrial commodities into money market funds, cash, U.S. 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 flavor 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.

Here are some of the main trends of a week in which 400-point moves in 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 United States 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 U.S. may be headed for another recession, and a week in which the euro zone's long-term ability to survive was questioned.

Here is how the money flowed:

MONEY MARKET

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 $52.78 billion 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

Equities markets were volatile all week.

Stocks fell on fear that the United States 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 $26.1 billion, the highest level since late in the second quarter of 2008, in the week ended August 10.

Lipper said investors pulled a net $14.4 billion out of U.S. 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.

OPTIONS

More than 150 million 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 41.5 million contracts traded on Monday and surpassed last week's 145 million contracts. Before August, trading of stock options had averaged about 17.8 million contracts a day.

COMMODITIES

Big speculators slashed their bullish bets in U.S. commodity markets by a massive $21 billion in the week to Aug 9, selling heavily into a major gold rally and cutting total positions to the lowest in a year.

Excluding some $6 billion of profit-taking in the U.S. gold futures and options market, so-called "managed money" funds cut their overall net long holdings in 21 other markets by nearly $15 billion, 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 $404 million for the week.

"As before, flows into funds specializing in gold and precious metals -- which have taken in over $9 billion 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.

FIXED INCOME

The general risk aversion resulted in the biggest net outflow for high-yield funds -- $6.71 billion -- since EPFR started tracking the sector in the second quarter of 2005.

A record $10.4 billion flowed out of global bond funds in the week to August 10

But overall U.S. bond funds suffered net outflows of just $1.5 billion, as money flowed into safe havens like U.S. Treasuries despite the S&P downgrade.

European bond funds saw net outflows of $1.13 billion, as Europe's sovereign debt crisis threatened to spread.

A Federal Reserve promise to keep interest rates near zero until at least 2013 prompted $1.36 billion in net outflows from floating rate note funds, the most since EPFR started tracking the sector in the first quarter of 2007.

EMERGING MARKETS

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 $607 million in net outflows. Hard currency bond net outflows were $459 million. But local currency-denominated emerging market bond funds took in a net $108 million.

Barclays Capital said that was a little surprising given that emerging market currencies fell 2 percent against the U.S. dollar during the week.

Emerging market equity funds had a net $7 billion pulled out, the most since the third week of 2008, EPFR said.

Dedicated long-only emerging market equity funds had net outflows of $7.76 billion while the broader global emerging market funds saw $3.24 billion in net outflows.

Latin America had outflows of $692 million. Russia had net outflows of $412 million, its worst week since June 2006.

Hong Kong focused equity funds had net outflows of $352 million, representing 6 percent of assets under management.

HIGH FREQUENCY TRADE

High-frequency traders' using algorithm-triggered computers have been pouncing since late July as spreads and volatility rose.

High-frequency trading represented 65 percent of total U.S. equity volume in the first 11 days of August, up from 53 percent 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 percent.

"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.

IPOS

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 $540 million, 14 percent 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 percent and ended up 30 percent at the end of the week. It had priced at the bottom of a lowered range and raised 38 percent 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.

IPOs that were expected this week but postponed were: Cathay Industrial Biotech; Enduro Royalty Trust; TIM w.e.; InvenSense; HomeStreet; WageWorks; Loyalty Alliance Enterprise Corp; WhiteGlove; Midland States Bancorp; TrustWave Holdings.

(Writing by Janet Guttsman, reporting by Daniel Bases, Ann Saphir, Jonathan Leff, Jed Horowitz and Clare Baldwin. Editing by Martin Howell)

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