A funny thing happened in global financial markets last week, which could be a warning for future volatility. Stock markets in China and Europe tanked, spilling over into the U.S. and other markets despite the fact that weekly inflows into equity markets had reached their highest level for the year.
Altogether $25 billion flowed into global stock markets for the week ended July 8, led by China’s stock market, which captured $13 billion, primarily in domestic A-shares ETFs, according to Bank of America Merrill Lynch’s weekly fund flow report.
U.S. stock markets followed with inflows of $10.7 billion, up 0.3% from the previous week, then Japan with inflows of $2.3 billion, up 0.8%. Europe lagged but still had positive flows, up $1.4 billion, or 0.1%, despite the Greek vote opposing additional austerity measures that were required for an extended bailout fund from the European Central Bank, International Monetary Fund and European Commission. Two billion dollars left global bond markets, capping five weeks of redemptions totalling $28 billion, the largest outflow in two years.
Despite inflows into global stock markets, major indexes fell, pushing almost all global equity markets below their 200-day and 50-day moving averages. Those declines “triggered a contrarian ‘buy’ signal,” according to the report, which historically lead to a rally that averages 6.5% in the three months that follow, the report noted.
The rebound appears to have already started. China’s Shanghai and Shenzhen stock indexes are up between 12% and 13% since July 8. The iShares European index (IEV) has gained 6%, the Dow Jones industrial average is up about 2.5%, and the Nikkei 1.8%. Whether the rebound will continue will depend on what happens next in China and Greece.
China’s stock markets finally recovered last week after a series of moves by the Chinese government to limit volatility in the domestic stock market, including restrictions on new IPOs and on margin lending to finance stock purchases, pledges of additional liquidity for the state-backed China Securities Finance Corp. and a push for major shareholders and top executives to buy back company shares. Initially the intervention failed to slow the slide, so the Chinese government took additional steps.