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 The bank's U.S. economists also said on Friday that the likelihood
of the world's largest economy entering a recession in the coming
year has risen to 20 percent from 15 percent.
While a repeat of the 2008-09 great recession "is a big stretch" and
even the one-in-five chance of a normal recession remains low, they
cut their 2016 growth forecast to 2.1 percent from 2.5 percent.
Reflecting the increasingly bearish sentiment engulfing world
markets, some $7.8 trillion was wiped off the value of global stocks
in the three weeks to Jan. 21, BAML said.
"We cannot rule out a recession in the next year. Accidents will
happen, and we are concerned about the lack of policy ammunition to
deal with a major shock," economists Ethan Harris and Emanuella
Enenajor said in a note on Friday.
"However, when markets are in such a fragile state there is a
temptation to lose sight of the economic fundamentals. To us, the
economy is okay and recession risks are low," they said.
Stocks around the world have had one of their worst Januarys on
record, with slumping oil prices, deepening concern over China, and
the Federal Reserve's first interest rate hike in a decade all
spooking investors.
A recession is typically defined as two consecutive quarters of
economic contraction. The U.S. economy ground to a virtual
standstill in the fourth quarter of last year, according to many
estimates, and the manufacturing sector is already in recession.
Earlier this week, economists at Citi said the risk of a global
recession was rising, Morgan Stanley put the probability at 20
percent in a worst case scenario, and French bank Societe Generale
said it was 10 percent and rising.
In the latest week, high-yield bond funds posted their
second-biggest outflow for a year and emerging market stocks their
largest outflow in around five months, said BAML, which also uses
data from the EPFR Global fund research house.
Government bond funds attracted a "huge" $5.1 billion in the week to
Jan. 20, the biggest inflow in 12 months. The 10-year U.S. Treasury
yield fell below 2 percent this week for the first time in three
months, and investors slashed bets on how far the Federal Reserve
will raise interest rates this year.
Futures markets are now pricing in just one quarter-point increase
in 2016, and not until late in the year.
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The flip side of that safe-haven flow in the fixed income universe
was a $4.9 billion outflow from high-yield bonds, the second largest
in a year, BAML said.
The exodus from equity funds continued in the third week of January
at a more modest pace. Investors withdrew a net $3.5 billion from
equity funds in the week to Jan. 20, BAML said, the third
consecutive outflow.
The $24 billion outflow over three weeks is equivalent to only 0.3
percent of assets under management, suggesting there is further room
for "capitulation" selling, BAML said.
"This pales in comparison to $36 billion during the August 2015
sell-off, $90 billion during the August 2011 debt ceiling sell-off,
$85 billion during the 2008 great financial crisis," BAML said.
Europe's main stock markets and Japan's Nikkei index entered bear
market territory this week, marking a decline of 20 percent or more
from their peaks. But all bounced back sharply on Friday.
Investors pulled $2.3 billion from emerging market equity funds and
$4.3 billion from U.S. funds in the week to Jan. 20, while Japanese
stock funds attracted a net $3 billion.
(Editing by Hugh Lawson)
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