LONDON Investors pulled billions of dollars out of cash in the latest week and turned towards an array of bond funds and equities -- notably bank stocks -- ahead of the keenly awaited August U.S. employment report, Bank of America Merrill Lynch said on Friday.
Precious metals funds suffered their biggest weekly outflow of the year as expectations of higher U.S. interest rates by the end of the year strengthened, BAML said.
Flows into emerging market bond funds reached record levels in the week ending Aug. 31, while European equity funds chalked up a record-breaking 30th consecutive weekly outflow.
Economists expect non-farm payrolls report later on Friday to show 180,000 new jobs were created last month, a dip in the unemployment rate and continued wage growth. A strong report could set the seal on the Federal Reserve raising rates in December, maybe even before.
"Banks are back," BAML said in a note titled "Banking on Payrolls".
Financial equity funds drew in $1.2 billion, the biggest inflow in 10 months, although BAML cautioned that a stubbornly flat U.S. yield curve has yet to confirm a cyclical upturn in the sector.
Banks profit from a steeper yield curve, when the gap between long-term and short-term yields widens. The opposite, a flattening curve, is generally bad for banks and the U.S. curve is currently around its flattest since late 2007.
Money market funds posted an outflow of $16.7 billion in the week to Aug. 31, and precious metals funds an outflow of $600 million.
Investors pulled $1.1 billion out of European equity funds, marking the 30th consecutive weekly redemption, although the pace of outflows is slowing, BAML said.
Stocks in general, however, posted an inflow of $1.8 billion, led by U.S. and emerging market funds.
So far this year, investors have withdrawn $132.3 billion from developed market equity funds, while emerging market stock funds are up $2.2 billion.
In fixed income, emerging market bond funds attracted investment for a record ninth week in a row, although the $700 million inflow was the lowest in that time.
Investment grade corporate bond funds attracted a $2.3 billion inflow, the 25th inflow out of the past 26 weeks, while government bond funds posted their eighth consecutive outflow.
Bond funds in total have posted a net inflow of $148.6 billion so far this year, BAML said.
(Editing by Catherine Evans)