LONDON (Reuters) - Italy-only equity funds suffered record outflows in the week to May 23, equivalent to 6 percent of total investments in such funds, Bank of America Merrill Lynch (BAML) said on Friday, as investors eyed the prospect of a eurosceptic government.
The heavy redemptions, which totalled $380 million, according to data from the bank and fund flows research house EPFR Global, reflected investor concerns about Italy’s radical government, currently taking shape.
The right-wing League and anti-establishment 5-Star Movement have agreed a coalition, triggering jitters about a fiscal spending splurge and a possible clash with the European Union that could force the country out of the euro.
At nearly 10 times the size of Greece’s economy and the third biggest in the euro zone, Italy is seen as far too big for Germany, France and the other 16 states in the euro to bail out.
Yields on Italy’s 10-year government bonds have climbed to 2.5 percent IT10YT=RR, lifting the spread over equivalent German Bunds to a near one-year peak of 200 basis points.
The week's other big story - the strain in emerging markets, best typified by the Turkish lira crashing to repeated record lows TRY= - was evident in emerging debt funds notching up their fifth straight week of outflows, losing $300 million.
Turkey has taken a pounding as it is seen as one of the most vulnerable emerging markets to higher U.S. rates due to its big external funding requirement. The Turkish central bank is viewed as behind the curve in tackling persistent double-digit inflation and was forced to hike rates by 300 basis points on Wednesday.
But emerging market equity funds attracted small inflows of $100 million, and BAML noted that investors were still long emerging markets with thus far very few redemptions.
In total, equity funds suffered outflows of $500 million, while bond funds had redemptions of $1.5 billion.
The week’s big winners were natural resources funds, with energy attracting $600 million and materials $400 million.
“Note (that the) U.S. (is) now the largest world energy producer and exporter,” the bank’s analysts said, adding that the U.S. rig count was at a three-year high.
Oil is the current leader of BAML’s cross-asset league table of winners and losers, up 18.9 percent in dollar terms year-to-date.
Emerging market sovereign bonds are languishing at the bottom of the table, having lost 4.5 percent so far this year.
Reporting by Claire Milhench; Editing by Susan Fenton