By Claire Milhench
LONDON (Reuters) - Threats by U.S. President Donald Trump to rain down "fire and fury" on North Korea preceded the biggest equity outflows in 10 weeks, Bank of America Merrill Lynch (NYSE:BAC) (BAML) data showed on Friday.
The weekly data, which tracks fund flows from Wednesday to Wednesday, showed investors pulled $1.3 billion from stock funds with outflows clustered from Thursday to Monday after tensions spiked between the United States and North Korea.
Trump was responding to threats by North Korea to fire missiles over Japan to land near the U.S. Pacific territory of Guam. Global equity markets lost nearly $1 trillion following his warlike rhetoric.
Investors fled for the perceived safe haven of bonds, which attracted $3.5 billion, and precious metals, which pulled in $500 million, their biggest inflows in 10 weeks, BAML said. Gold <XAU=> is currently trading at nine-month highs.
Within equities it was U.S. stocks that again bore the brunt of the selling with $4 billion of redemptions. The S&P 500 (SPX) fell 1.4 percent last week, its biggest fall since March.
Emerging market stocks also suffered their first outflows in 22 weeks, losing $1.6 billion as investors recoiled from riskier assets.
MSCI's benchmark emerging equities index (MSCIEF) ended last week down 2.3 percent, its worst week since December, with Asian markets such as South Korea (KS11) down over 3 percent.
Emerging market debt funds suffered their first outflows in 29 weeks -- albeit a modest $100 million -- whilst $2.3 billion was pulled from high yield bond funds, the biggest outflows in almost six months.
BAML noted that high yield spreads jumped 36 basis points (bps) last week from 364 bps to 400 bps over Treasuries.
Looking ahead, the bank suggested there could be a big risk-off trade in markets in August or September if growing geopolitical, political or tax reform volatility showed up in weaker August U.S. consumer confidence or European Union and Japanese business confidence data.
So far investors continue to favor European and Japanese equities, which attracted $500 million and $2.5 billion respectively over the week, with Japan enjoying its biggest inflows in 20 weeks.
Other 'risk-off' scenarios that BAML suggested included a rising U.S. dollar fueled by risk aversion, despite lower U.S. Treasury yields and a further drop in U.S. presidential approval ratings, or if U.S. high yield credit spreads rose further toward 500 basis points.