Equity Capital Is Moving From US To Europe With Greater Zeal

Authored by Simon White, Bloomberg macro strategist,

The pace of outflows from US stocks is picking up, while inflows to European equities is accelerating.

Money, like water, always takes the path of least resistance. The risks of fiscal austerity and recession in the US is provoking capital to leave that market and travel eastwards to Europe, where massive fiscal expansion is on the cards.

ETFs give a very good real-time indication of capital flows in equity markets given their large size. The chart below shows the net quarterly flows for the largest ETFs, whose AUM is the majority of the total for all ETFs in the same class. It is self-explanatory.

The trend of equity capital leaving the US and heading to Europe began at the start of this year, but the pace has picked up in the last few weeks.

Chatter around a Mar-a-Lago accord has been scaring the horses. An astounding near $18 trillion of foreign capital has flowed into US equities over the last five years, pushing the US’s current account deficit much wider and contributing to the country’s now deeply negative net international investment position of over 100% of GDP.

Tariffs work directly on the trade deficit. But as the “stick” in a wider renegotiation of the dollar’s role in the global financial system, they are affecting capital flows too. Whether it’s intentional or not, it’s certainly one way to reduce the current account deficit, which is ultimately what matters from a rebalancing perspective.

Needless to say, $18 trillion is a lot of potential capital to flow out of the US. Whether the pace continues to accelerate will depend on how much the dollar is weaponized, ie how much or little of a putative Mar-a-Lago accord is actually put into practice; and to what extent Europe actually follows through with the huge stimulus numbers that have been suggested so far.

It also depends on whether such a large amount of capital can find a profitable home outside of the US market without taking valuations into nosebleed territory.

One way or the other, there is a lot of capital is moving across the Atlantic, and with increasing zeal.