Global equity funds experienced a second straight week of net withdrawals in the seven-day period ending May 28, shedding $7.5 billion as investors became increasingly risk-averse amid renewed concerns over U.S. tariff threats and the broader implications for economic growth. The outflows follow a $9.5 billion withdrawal in the prior week, underscoring growing unease about the potential for escalating trade disputes to derail corporate earnings. The wave of redemptions came despite mixed signals in regional markets, with European equity funds enjoying modest inflows even as investors retreated from U.S. and Asian stocks.

A key catalyst for the pullback was President Trump’s surprise public warning that, starting June 1, he could impose 50 percent duties on imports from the European Union—including cars, wine, cheese and other consumer goods—unless the bloc shelved its digital services tax. Although the administration ultimately delayed implementation until July 9 following high-level discussions, the initial announcement rattled markets and reignited fears of a full-blown transatlantic tariff war. At the same time, threatened tariffs on foreign-made iPhones fanned concern that cross-border supply chains could face renewed disruption.

Asian Equity Funds Hardest Hit

Asia-focused equity funds bore the brunt of the selling pressure, with investors yanking out approximately $6 billion during the week—marking their largest weekly outflow since August 2018. The pullback spanned broad swathes of the region: Chinese A-share and Hong Kong-listed tech-heavy portfolios saw sharp redemptions, while South Korean and Taiwanese semiconductor-focused funds experienced notable net withdrawals as traders balked at the prospect of U.S.-China tensions rippling through technology supply chains. Overall, Asian equity funds now face a year-to-date return that trails global peers by roughly 400 basis points, with the latest outflows compounding weak performance amid China’s softening growth in the first quarter of 2025.

Domestic U.S. equity funds were not spared, recording $5.46 billion of outflows in the same period—the second consecutive week of net redemptions after a $11 billion withdrawal through May 21. Small-cap strategies suffered the most acute pain, with investors pulling $2.4 billion from various Russell 2000-focused funds—their heaviest weekly exodus since late April. Large- and mid-cap U.S. equity funds also saw outflows totaling $5.5 billion and $1 billion, respectively, as growing fears over eroding profit margins in a higher-tariff environment prompted portfolio rebalancing toward defensive sectors.

Nonetheless, certain sector-specific funds bucked the broader outflow trend: technology sector ETFs recorded modest inflows of roughly $1.4 billion, reflecting investor belief that leading software and cloud-computing firms can insulate themselves from incremental trade costs. Industrial sector funds, too, managed to secure about $500 million in fresh allocations, as some firms announced supply-chain diversification measures to mitigate the impact of new tariffs. Still, the net effect was a negative week for broad U.S. equity strategies, with the S&P 500 Index declining by nearly 2 percent from May 21 through May 28, while the Nasdaq Composite fell by 1.8 percent.

European Equity Funds Remain a Relative Safe Haven

In contrast to the outflows elsewhere, European equity funds drew $3.6 billion during the week ending May 28, marking their seventh straight week of net inflows. Portfolio managers cited relatively attractive valuations—particularly among luxury and consumer discretionary names that stand to benefit if the EU successfully thwarts U.S. tariffs—as well as ongoing corporate earnings beats in Germany, France and the U.K. Fund managers also noted that the eurozone’s central bank had signaled a willingness to maintain accommodative monetary policy in light of softer inflation readings, further underpinning regional equities.

Financials and consumer discretionary sectors accounted for a large portion of the influx, as European banks reported better-than-expected first-quarter earnings, and luxury goods companies highlighted robust demand from Middle Eastern and Asian tourists. Utilities and healthcare strategies took in smaller, yet still positive, inflows—driven by investor preference for stable dividend payouts amid a murky global trade outlook. Overall, the contrast between European fund inflows and the broader global outflows underscores how regional sentiment can diverge sharply in response to localized economic and policy developments.

Bond Funds Continue to Attract Capital

Amid equity redemptions, investors piled back into fixed income vehicles, sending a net $15.3 billion into global bond funds—the sixth consecutive week of inflows. U.S. bond funds led the charge with $7 billion of net purchases, followed by European bond strategies at $6.2 billion and Asian bond funds at $1.3 billion. Demand was particularly strong for government and high-yield bond funds, which posted inflows of $1.9 billion and $1.5 billion, respectively.

Traders noted that escalating long-term Treasury yields—U.S. 10-year rates climbed above 4.4 percent on May 28, their highest level in nearly a year—provided an attractive entry point for bond buyers. The jump in yields reflected a combination of lingering inflation concerns and Fed projections indicating a “higher for longer” interest-rate trajectory. As a result, many investors sought to lock in the elevated yields before any further tightening or market-driven selloff. In Europe, German bund yields also ticked upward to near zero percent after the European Central Bank’s unexpectedly hawkish hawkish signals earlier in May, prompting renewed interest in euro-denominated government paper.

Money market funds, which had enjoyed a $18.7 billion inflow in the prior week, saw an abrupt reversal as clients redeemed $36.5 billion during the latest period. Fund managers attributed the turnaround to quarter-end liquidity needs, as treasury desks drained cash buffers to meet margin calls on derivatives positions and to restore lending capacity. In addition, some large corporate treasuries reallocated idle cash toward short-duration bond funds to capture the fleeting high-yield environment in a rising-rate cycle. The steep outflow from money markets indicates that, even amid elevated trade tensions, investors are increasingly aware of the opportunity cost of parking capital at near-zero returns.

Precious Metals Funds Attract Safe-Haven Demand

Gold and precious metals commodity funds snapped a five-week streak of outflows, drawing approximately $1.3 billion as investors sought refuge from equity market turbulence. The price of gold climbed above $2,360 per ounce by May 28, buoyed by expectations of slower Fed rate cuts and geopolitical uncertainty stemming from U.S.-EU trade rhetoric. Silver, platinum and palladium-focused strategies also experienced modest inflows, reflecting portfolio diversification as market participants awaited further clarity on the U.S. administration’s tariff and foreign policy direction.

Among emerging market (EM) funds, equity vehicles recorded a more modest outflow of $183 million—a significant deceleration from the $1.4 billion withdrawn in the prior week—suggesting that EM equities were stabilizing after earlier selloffs tied to China’s underwhelming economic data in early May. EM bond funds, meanwhile, notched a fifth consecutive week of inflows, garnering $885 million as investors hunted for yield amid tightening global liquidity. Strong flows into local-currency and U.S.-dollar–denominated EM bonds were driven by improving fundamentals in select countries, notably India, Brazil and Indonesia, where central banks have paused or are cutting rates in response to easing inflation.

The recent run of global equity outflows reflects a convergence of factors: the resurgence of trade-war rhetoric, concerns over sticky inflation, and the prospect of tighter monetary policy from major central banks. Investors have grown increasingly wary of a scenario where higher U.S. tariffs on European goods—and threatened duties on Chinese and other Asian imports—consume corporate mindshare, disrupt supply chains and compress profit margins. Many multinational firms have already announced plans to redirect supply chains away from China and Europe to Southeast Asia or Latin America to mitigate duties, but replacing entrenched production networks is neither quick nor cost-effective.

At the same time, U.S. data releases in May revealed that core Personal Consumption Expenditures (PCE) inflation remained elevated at 2.5 percent year-over-year, above the Federal Reserve’s 2 percent target. Despite slowing headline PCE inflation—down to 2.1 percent in April—policymakers have signaled a willingness to keep policy rates higher for longer to ensure inflation is truly under control. Fed officials noted that, even if headline inflation appears near target, services and shelter costs remain stubbornly high. These dynamics underpin sustained demand for fixed income and reinforce caution toward equity allocations.

Compounding the uncertainty is evidence that consumer spending growth lost momentum in April—the 0.2 percent monthly increase was the smallest gain in six months—and personal savings rose to 4.9 percent, indicative of households tucking away funds in response to economic ambiguity. Consumer confidence surveys also hinted at rising unease: in late May, the University of Michigan’s Consumer Sentiment Index dipped to its lowest level since early 2023, driven by concerns over tariffs, inflation and the future path of interest rates.

Investor Strategies and Shifting Asset Allocations

In response to these headwinds, global fund managers have been actively reallocating portfolios toward defensive themes. Bond-inflation-linked funds, high-quality corporate credit and short-duration strategies have seen notable inflows. Among equities, dividend-yielding and low-volatility funds have attracted capital as investors seek smoother returns. ESG-focused funds—particularly those weighted toward renewable energy and clean technology—have also benefited modestly, underpinned by a belief that decarbonization initiatives could insulate companies from shifting trade dynamics and higher input costs.

Technically, algorithmic traders have reduced exposure to momentum-driven equity strategies, contributing to wider bid-ask spreads in some mid-cap and small-cap stocks. Meanwhile, volatility indexes, such as the VIX for the S&P 500, spiked above 19 in late May—near the upper end of their trading range for 2025—reflecting the tug-of-war between resilient corporate earnings and macroeconomic headwinds. For many fund managers, the key question remains: will the eventual July 9 date for the newly postponed tariffs provide a reprieve for risk assets, or will it simply postpone the reckoning for another day?

Looking Ahead

As global investors brace for continued trade-policy twists, the immediate outlook for equity fund flows remains uncertain. Should the July deadline for EU tariffs approach without a diplomatic breakthrough, further outflows from risk assets may ensue, exacerbating pressure on valuations in equity markets—particularly in sectors most exposed to import costs, such as automotive, consumer staples and technology manufacturing. Conversely, if U.S. officials and EU negotiators secure an agreement to roll back threatened duties, markets could experience a relief rally, prompting a tactical reversal of recent redemptions.

For now, the prevailing strategy among many asset allocators is to emphasize portfolio resilience: overweighting quality fixed income, seeking the comfort of dividend-bearing equities in defensive sectors, and maintaining cash buffers sufficient to take advantage of dislocations. In this climate of heightened tariff uncertainty and rising bond yields, investors appear to be signaling that preserving capital takes precedence over chasing incremental upside—at least until trade-war clouds clear and central bank signals align more convincingly with an easing bias.

The second consecutive weekly outflow from global equity funds reinforces the notion that, in 2025, trade policy is again becoming a primary driver of capital flows. Whether these jitters prompt a more enduring shift toward fixed income and alternative hedges—or simply reflect a temporary cautionary pause before a mid-year rebound—remains to be seen. What is clear, however, is that tariff-related headlines now carry the weight to unsettle even the most diversified portfolios, underscoring the fragile equilibrium between global growth optimism and protectionist impulses.

(Adapted from USNews.com)

Categories: Economy & Finance, Geopolitics, Regulations & Legal, Strategy