By Claire Milhench
LONDON (Reuters) - Investors shovelled $1.5 billion into equities in the week to June 1, the first net inflows in eight weeks, as appetite for U.S. stocks in particular improved, Bank of America Merrill Lynch (BAML) said on Friday.
The more bullish mood marks an about-turn from the "risk off" mode that has dominated investor sentiment for the last two months, a switch the bank attributed to a combination of "okay macro data", resilient oil and a rally in financials.
U.S. stocks attracted the bulk of the inflows with $1.2 billion, whilst emerging market equities attracted some $300 million - the first inflows in five weeks for both of these segments.
BAML noted that U.S. stocks were a hair's breadth away from their all-time highs, with the S&P 500 <.SPX> climbing 1.5 percent in May.
It added that the U.S. May ISM numbers, which surprised on the upside, were consistent with the S&P 500 at the 2,150 level. The index is currently trading a little shy of this level.
In terms of sector flows, financials enjoyed their biggest inflows in six months, attracting $600 million, whilst tech stocks attracted $100 million, their first inflows in seven weeks.
However, BAML noted a divergence between mutual fund and exchange-traded fund (ETF) flows. Whilst equity ETFs attracted some $6.4 billion, equity mutual funds saw $4.9 billion of outflows.
"Low liquidity, high regulation, low conviction, high crowding, unintended consequences of NIRP [negative interest rate policies] and overdue 'dislocation' = fragile investment backdrop," Michael Hartnett, chief investment strategist at BAML, said in the note.
European equities have now racked up 17 straight weeks of outflows, with another $700 million pulled out over the week to Wednesday. BAML also noted that the $48 billion of redemptions from Asia ex-Japan equity funds over the past 18 months mean the inflows from 2002-10 have been completely unwound.
BAML identified several "volatility catalysts" on the horizon for investors, including a potential rate rise by the U.S. Federal Reserve on June 15 being greeted as a policy mistake, and a vote for Britain to leave the European Union in the June 23 referendum.
This event risk could explain why bonds still attracted $2.9 billion of inflows, with investment grade bond funds winning the bulk of the assets at $2.7 billion.
(Editing by Hugh Lawson)