High market volatility forces investors turn to cash, gold

The stock markets last week witnessed shifting of priorities to gold and money markets funds as high volatility make equity markets uncertain following the steep fall of over nine percent on Chinese market on opening day of the week Monday. This has led to record outflows from equity funds during the week.

The total outflows during the week were $29.5 billion, out of which, Tuesday session alone registered $19bn, according to the data from EPER by Bank of America Merrill Lynch. As per the latest data, over $22 bn flown into money market funds.

Volatility index closed at 40.75, highest since Eurozone crisis in 2011, as equities tumbled on last Monday (24 August).

The volatile markets had forced investors to switch over to gold and money fund markets as a result, the yellow metal price reached six week high at $1,156.70 an ounce and later eased to $1,127 as equity markets recovered marginally by the end of the week.

Investors continued to invest in gold in the wake of volatile market conditions globally.

The China economy slowdown and its currency devaluation, discouraging numbers from manufacturing sector had dampened the market sentiment pushing investors towards safe-haven investment like gold. Possible US Fed rate hike also put pressure on markets this further led to more volumes in gold trading.

However, the latest indications that interest rate hike is unlikely again boosted the market sentiment. The last time US Fed hiked interest was in June 2006, when that situation also forced investors towards precious metals.

According to Bank of America Merrill Lynch, more than $22billion investment was flown into money market funds. The Chinese situation is the major reason. However, the inflow eased during the late last week. As per the Cran Data's Money Fund Intelligence Daily, the total net money fund assets rose by $10.7billion net during the week as the second half of the week recorded some outflows as well.

Since only beginning of the last week witnessed strong outflows from equities to gold and money markets and later part of the week recorded a marginal reverse trend as stock markets rebounded during the second half of the week. Hence, it's too early to come to a conclusion on the future course of the markets, feel analysts.

The US economy is growing and this is good news for investors as the world's largest economy will create opportunities for investors.

The US equity exchange traded funds (ETFs) also recorded outflows of $4.4bn till 26 August and inflows of $5.4bn on Wednesday alone. Though uncertainty was prevailing the market, second half of the week offered investors a comeback opportunity, opine Deborah Fuhr at ETFGI, a research firm.