By Sam Forgione
NEW YORK Dec 27 Investors poured $2.6 billion into stock funds worldwide in the week ended Wednesday in expectations the rally in U.S. stocks would continue into next year, data from fund-tracking firm EPFR Global showed on Friday.
The inflows into stock funds in the week ended Dec. 25 reversed the previous week's outflows of $3.4 billion and marked the strongest demand in four weeks, according to the data compiled by Reuters from EPFR Global and past Bank of America Merrill Lynch Global Research reports. Funds holding European and U.S. shares saw significant demand.
While investors committed cash to stock funds, they pulled $2.5 billion out of bond funds, marking the fourth straight week of outflows from fixed-income funds, the data from EPFR Global and Bank of America Merrill Lynch showed. They also pulled money from emerging markets stock and bond funds.
The inflows came in the wake of the Federal Reserve's announcement on Dec. 18 that it would cut its monthly purchases of Treasuries and agency mortgages by $10 billion to $75 billion starting in January, a move that surprised investors.
The Fed's bond-buying stimulus has kept interest rates low, which has fueled demand for stocks and helped boost the Standard & Poor's 500 over 29 percent this year through Thursday.
Funds that mainly hold U.S. stocks attracted $1 billion of the inflows into stock funds overall during the reporting period, reversing outflows over the previous week, according to the data from EPFR Global and Bank of America Merrill Lynch.
European stock funds raked in $2.4 billion in new cash, marking the 26th straight week of new demand for the funds.
The FTSEurofirst 300 index of top European shares booked its biggest rise in eight months on Dec. 20. Many investors have looked to European stocks in recent months on improving prospects in the region.
The S&P 500 hit record highs and rose 1.3 percent over the latest week, while MSCI's world equity index rose 1.5 percent. The U.S. stock market was closed on Wednesday for Christmas holiday and trading ended early on Tuesday.
The Fed's decision to cut its bond purchases reinforced investors' belief that the U.S. economy is improving, said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.
Strong U.S. data on economic growth, manufacturing and consumer spending reinforced expectations that the rally in U.S. stocks could continue into next year, Ghriskey said.
Japanese stock funds attracted $202 million in new cash over the reporting period, the first inflows in three weeks, EPFR Global data showed. Japan's Nikkei average hit a six-year closing high on Dec. 25.
Investors continued to pull cash out of funds that hold emerging market stocks, however, with the latest week's $1.3 billion in withdrawals marking the ninth straight week of outflows from the funds, according to EPFR Global and Bank of America Merrill Lynch data.
Analysts and investors have said that the Fed's bond-buying lifted emerging market stocks this year, and that the stocks have become more vulnerable as the Fed scales back stimulus.
Investors pulled cash out of bond funds over the weekly period, meanwhile, on expectations that interest rates will rise as the Fed unwinds its bond-buying program. Of the $2.5 billion in outflows from bond funds, $1 billion came from funds that hold U.S. bonds, the data from EPFR Global showed.
Selling pressure caused the yield on the benchmark 10-year U.S. Treasury to rise about 10 basis points to 2.98 percent by the close of trading on Dec. 24. The bond market closed at 2 p.m. (1900 GMT) on Tuesday and was closed on Wednesday.
The Fed's pullback also hit emerging market bond funds, which had outflows of $1.3 billion over the weekly period, EPFR Global data showed.