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US Equity Funds Are Seeing Big Inflows. Could This Mean the Fed Will Step Up?


Bad economic data is encouraging investors to allocate into US equities on hopes of Fed action.

MINYANVILLE ORIGINAL Amidst all of the rotten data out of Europe, it would seem obvious that institutional investors would want to keep their money far away from the continent.

Today Spain is looking so desperate that it is taking the focus off of Greece's election results and the uncertainty of its next government. Before the international community doles out a bailout of as much as $120 billion to troubled Spanish banks, Spain's central bank is auditing the country's financial institutions, which are contending with non-performing debt in the wake of a massive housing crisis and unemployment affecting as many as one out of four Spanish workers. Today Spain said that the audit will take another few months, raising fears that $120 billion will not quite be enough.

With data like this, and bond yields in the more trustworthy countries drifting into the negative, you can't blame investors for adopting an "anything, anywhere but Europe" approach, according to data provider EPFR. Indeed, Europe-mandated funds were not very popular at all last week. However, global portfolio managers took a less alarmist strategy, according to fund flow data from EPFR.

Though Europe equity funds saw a tenth week of outflows in 12 weeks and European bond funds saw their highest rate of redemptions since early December, global equity portfolio managers increased allocations to Europe. Such allocations stayed flat during the first quarter.

Aside from Europe, economic data is pointing south in the US and China as well. China's central bank will be taking action, and there is increased hope that the US will follow suit. Those expectations helped equities funds attract a 62-week high of $10.91 billion in inflows last week. The funds that are getting the bulk of the inflows are US equities funds, which took in more than 75% of inflows.

This data signals a level of optimism that central banks will take more action to support the markets. Tomorrow, the Fed will conclude its policy meeting and make an announcement at 12:30 p.m. Since the last meeting of the FOMC, there have been two absolutely rotten employment situation reports and muted inflation figures, making central bank action more appropriate and easier for critics to stomach. As this chart from Credit Suisse shows, an extension of Operation Twist is the most likely outcome of tomorrow's FOMC meeting.

Operation Twist "would be balance sheet neutral and, as a consequence, invite less criticism from those uncomfortable with the potential inflationary ramifications of further expanding the volume of bank reserves (and the monetary base)," according to the European investment bank.

Today, investors hoping for an adrenaline shot from the Fed lifted the S&P 500 (SPY) 1.21% to 1,361.11 and the Nasdaq (^IXIC) up 1.24% to 2,931.17.

Fed Chairman Ben Bernanke will hold a press conference tomorrow afternoon to discuss whatever the FOMC decides to do or decline to do.

Twitter: @vincent_trivett
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