One of the most volatile weeks in market history sparked a bigger flight to safety than the collapse of Lehman Brothers as global investors parked a record $50 billion in money market funds this week, yanking money out of bonds and shares.
Money markets attracted net inflows of $49.8 billion only a week after registering record outflows, according to EPFR Global, a data provider. In the week ending on Wednesday, equity funds had more money pulled out of them than at any time since early 2008, while investors moved faster out of risky junk-rated bonds than at any time since records began in 2005, according to data published on Friday.
The huge degree of risk aversion was revealed as global equity markets rallied, leaving many of them close to where they started the week. But that masked the degree of volatility with the Dow Jones Industrial Average recording for the first time seven straight sessions that alternated between ending the day higher one day and lower the next.
“Extraordinary is the very least you can say … The degree of the moves shows the markets are pricing in something really apocalyptic,” said David Shairp, global strategist at JPMorgan Asset Management, pointing to growing expectations of recession.
Investors have spent the week worrying about anaemic economic growth in developed countries and hoping that central banks will intervene to prop up markets. The European Central Bank bought Italian and Spanish bonds on Monday while the US Federal Reserve said it would keep interest rates at zero for two years on Tuesday, sending US benchmark borrowing costs to a record low.
The move into money market funds is a striking example of risk aversion as investors will earn next to nothing from being in them.
EPFR said about the fund flows: “An imperfect storm of downgrades, rumours, lacklustre macroeconomic data and the ongoing euro zone debt crisis transformed a retreat by investors into something approaching a stampede.” Equity funds reported collective outflows of $26.1 billion while a record $10.4 billion was pulled from bond funds.
European shares rallied on Friday after France, Italy, Spain and Belgium imposed a 15-day short-selling ban on more than 60 financial institutions. The initiative for the bans was led by France and last night the Financial Market Authority in Paris launched an inquiry into trading in the shares of Société Générale .
The French bank lost nearly a quarter of its market value at one stage on Wednesday as various rumours swirled around markets. Regulators said the ban was intended to stop wild rumours spreading rather than eliminate volatility.
The CAC-40 in Paris closed up 4 percent, the Dax-30 in Germany rose 3.5 per cent and the FTSE 100 in London ended 3 percent higher. Both French and German shares, however, remained bear markets, meaning they have fallen more than 20 percent from their highs this year. In midday trading in New York the S&P 500 was up 0.7 percent, still below its starting point for the week.
However, analysts and investors said it was difficult to call the bottom of the market. “It is a very brave call ... There could be 15-20 percent further downside,” said Robert Brown, head of the global investment committee at Towers Watson, a consultant.
Mr Shairp said: “Looking at levels of risk appetite and valuation levels it is starting to look more compelling. But what has been striking is how quickly markets have moved from relative normality to extremes.”