By Claire Milhench
LONDON (Reuters) - Global investors pulled $7.4 billion (£5.69 billion) from equity funds in the week to Wednesday, the largest outflow in around three months, as uncertainty over U.S. and Japanese monetary policy unnerved stocks, Bank of America (NYSE:BAC) Merrill Lynch (BAML) said on Friday.
A spike higher in longer-dated bond yields had caused yield curves in the United States, Japan and Germany to steepen over the past two weeks, prompting the redemptions from European, U.S. and emerging markets stocks funds.
Although there was little expectation that the U.S. Federal Reserve would raise rates at its Sept. 20-21 meeting, investors erred on the side of caution and parked $15.6 billion in money market funds in the run up to the Fed decision.
Investors were also wary ahead of the Bank of Japan's Sept. 21 meeting at which it made an abrupt shift in policy, saying it would buy government bonds when necessary to keep 10-year yields at their current levels of around zero percent.
The BOJ reassured markets that it would continue to buy riskier assets, but some analysts suggested it had overhauled its stimulus policy so it would be easier to exit in future.
"BoJ and Fed 'taper-tantrum' fears may have sparked redemptions in emerging market equity funds and in high yield bond funds," BAML analysts wrote in a note.
A steeper U.S. yield curve strengthens the appeal of risk-free bonds such as U.S. Treasuries over lower quality assets in emerging markets.
Emerging market equities saw their first outflows in 12 weeks, albeit a small $100 million, whilst some $1.2 billion was redeemed from high yield bond funds.
U.S. equity funds lost $7.7 billion, their largest outflows in 12 weeks, whilst European equity funds lost $1.8 billion in a record 33rd straight week of redemptions.
"Europe continues to be the 'vacant' trade (with) no interest since the February 2016 market lows," BAML said. European stocks (FTEU3) have fallen 5.3 percent so far this year.
Japanese equities bucked the trend, attracting $2.4 billion. The Nikkei (N225) was up around 7.6 percent in the third quarter, but is still down almost 12 percent so far this year.
Overall, bond funds attracted some $3.8 billion, with emerging market debt funds pulling in $1.5 billion in their 12th straight week of inflows. Investment grade bonds attracted some $2.8 billion.