UPDATE 2-European stock funds gain $2.3 bln in new cash - BofA

Fri Aug 16, 2013 5:01pm EDT

By Sam Forgione

NEW YORK Aug 16 (Reuters) - Investors worldwide poured $2.3 billion into European stock funds in the latest week, the most in over two years, as European stocks rose, a Bank of America Merrill Lynch Global Research report showed on Friday.

The inflows came during the weekly period ended Aug. 14. Data on Wednesday showed that the economies of Germany and France grew more quickly than expected in the second quarter, pulling the euro zone out of a 1-1/2-year recession.

"You've got a pretty decent setup in Europe," said Chris Konstantinos, director of international portfolio management at RiverFront Investment Group, which oversees $3.8 billion. He said earnings could soon bottom for European companies, which would be bullish for the region's stocks.

A higher-than-expected rise in China's industrial output also supported European stocks during the weekly period. The FTSEurofirst 300 of leading European shares rose 1.87 percent over the week.

While demand for European stock funds was high, investors soured on U.S. stock funds and withdrew $1.9 billion, marking the first outflows from the funds in seven weeks.

The benchmark S&P 500 stock index fell 0.33 percent over the week on continued fears that the Federal Reserve will begin winding down its bond-buying stimulus, which may cause interest rates to spike higher.

The Fed is buying $85 billion in Treasuries and agency mortgages monthly in an effort to spur hiring and keep interest rates low.

Fed presidents Richard Fisher and Dennis Lockhart hinted over the weekly period that the U.S. central bank could begin reducing its stimulus next month.

Stock funds overall attracted $1.3 billion in new cash, down from $9.6 billion in inflows the previous week, according to the report, which also cited data from fund-tracking firm EPFR Global.

Japanese stock funds attracted $700 million in new cash, the same amount of inflows as the previous week, even as data on Monday showed that Japan's economy grew at a slower-than-expected pace in the second quarter.

Bond funds, meanwhile, had $1.4 billion in outflows over the weekly period as interest rates rose on U.S. Treasuries, down from outflows of $2.2 billion the prior week.

U.S. bond funds accounted for $806 million of those outflows, marking their third straight week of outflows. The latest week still showed improvement after investors pulled about $2.1 billion from the funds the previous week, according to data from EPFR Global.

The concern about interest rates continuing to rise likely drove outflows from bond funds, said Margaret Patel, managing director at Wells Capital Management.

Patel said, however, that the bond market sell-off has been driven more by anticipation of the Fed's pullback than fundamentals, since inflation has not changed and there has been "no sign of material improvement" in the labor market.

The yield on the benchmark 10-year U.S. Treasury note rose about 11 basis points to 2.71 percent over the weekly period. Yields rise as prices fall.

The yield on the safe-haven bond rose partly on positive U.S. economic data showing that weekly jobless claims rose less than expected and consumer spending rose. The data fanned fears that the Fed will scale back its easy-money policies soon.

Riskier high-yield bond funds had meager inflows of $45 million in the latest week, down from cash gains of $1.3 billion the previous week, the report said.

Emerging market bond funds, meanwhile, had outflows of $834 million, data from EPFR Global showed. That marked the 12th straight week in which investors pulled money out of the funds, according to the fund-tracker.

Funds that primarily hold Treasury inflation-protected securities, or TIPS, meanwhile, had outflows of $200 million, marking the 18th straight week of outflows from the funds, the report added.

Commodities funds worldwide, which primarily invest in physical gold, had small outflows of $66 million, extending the funds' record-long outflow streak to 27 weeks.

The outflows from the funds occurred even as spot gold rose as much as 2.2 percent to $1,343.06 an ounce on Monday, its highest since July 24.

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