LONDON The $1 trillion of financial assets that central banks in Europe and Japan have bought so far this year is the best explanation for the gains seen in global stocks and bonds despite lingering political risks, Bank of America Merrill Lynch said on Friday.
If the current pace of central bank buying, dubbed the "liquidity supernova" by BAML, continues through the year, 2017 would record their largest financial asset purchases in a decade, the broker said in its weekly report on investment flows.
Shorter-term investor flows pointed to a mild "risk-off" with $3.8 billion pumped into bond funds and $0.6 billion pulled from equities over the past week, BAML said.
A run of disappointing U.S. economic data, questions about whether the Trump administration can push through tax cuts and uncertainty around the French election have dented some of the enthusiasm for risky assets in recent weeks.
Global stocks .MIWD00000PUS, which hit a record high last month are down about 1.3 percent from those peaks as investors locked in some profits.
U.S. stocks, which have led gains since last summer, have now seen outflows in four of the last five weeks, BAML said, adding that another $2.6 billion was pulled out in the latest week.
The mood on European stocks, particularly among global investors, remains bright, the data showed, as relatively attractive valuations and a better economic backdrop have so far trumped risks related to politics.
European equity funds pulled in $0.6 billion over the past week, their fourth straight week of inflows, BAML said.
The risk-on script on Europe would get ripped up, however, in the "worst case outcome" if far-right candidate Marie Le Pen and/or hard-left challenger Jean-Luc Melenchon go through to the second round, the broker said.
If Le Pen and Melenchon do go through, BAML warns of a major risk-off in European and globally.
The latest poll showed that French centrist Emmanuel Macron is set to come out on top in the first round on Sunday.
(Reporting by Vikram Subhedar; Editing by Alison Williams)