U.S.-Sino trade war boost fund flows to 'Treasury Island': BAML

LONDON (Reuters) - Rising trade tensions between the United States and China have sparked equity outflows over the last week, though so far there has only been a modest unwind of 2018’s most popular trades, fund flows data show.

A weekly data compilation by Bank of America Merrill Lynch (BAML) showed the third straight week of equity outflows, with redemptions of $7.2 billion, according to a note received on Friday. Bonds on the other hand recorded the biggest inflows in 12 weeks at $8.1 billion, while gold attracted $1.1 billion.

“Off to Treasury Island to flee stormy China-U.S. weather,” BAML titled its weekly note, adding that U.S. Treasuries had seen their biggest inflows since January 2016 at $4 billion.

“(This) shows investors positioning for lower yields; BAML private client debt allocation is up to 23.3 percent...Treasury inflows are the most visible expression of positioning for risk-off to date.”

Global markets have been on a roller-coaster in recent days after U.S. President Donald Trump ratcheted up pressure on China, stoking fears the world’s two largest economies could be headed for an all-out trade war.

In his latest salvo, Trump said late on Thursday he had instructed U.S. trade officials to consider $100 billion in additional tariffs on China. Beijing warned early on Friday it would fight back “at any cost” with fresh measures to safeguard its interests.

Yet the ups and downs this week suggest investors are not yet convinced the dispute will mushroom into a full-blown trade war that threatens global economic growth.

Emerging markets still enjoyed inflows into debt and equity funds of $5.4 billion, with cumulative emerging market inflows now at an all-time high of $363 billion.

“(The) inability of (U.S. 10-year Treasuries) to break 3 percent and stubborn U.S. dollar weakness helps explain emerging market resilience to rising trade war concerns,” BAML concluded.

Looking at the year’s most crowded trades - betting on short volatility and U.S. Treasuries and a rise in tech and bank stocks as well as large and mid-cap firms across wider developed market - showed a “modest unwind”, BAML found.

Tech stocks - which had driven much of the global equity rally in recent months before taking a hefty beating in the past weeks - suffered some outflows. Yet it is far from capitulation, BAML said, noting redemptions from tech of $300 million and consumer funds at $1.1 billion looked “very modest relative to combined $20 billion inflows past six months”.

BAML also predicted the second quarter “pain trade” - or unexpected turn in the market that could catch most investors flat-footed - could be to short emerging markets and long U.S. dollar.

For the dollar index .DXY to break decisively above 91, wages needed to surge or average hourly earnings to rise than 0.4 percent, BAML said.

March data, due on Friday, were expected to show U.S. non-farm payroll growth of 193,000 jobs versus 313,000 the previous month with average hourly earnings expected to increase 0.2 percent, according to a Thomson Reuters poll.

Reporting by Karin Strohecker; Editing by Mark Heinrich