Fears the U.S. Federal Reserve could make a policy mistake by sticking to plans to raise interest rates next year have driven investors to abandon stocks and pile into bonds, Bank of America Merrill Lynch strategists said on Friday.

Government bond funds had their biggest inflows since January 2016 with $5 billion plowed into the assets seen as safer than stocks, BAML said in a note citing flows data from data provider EPFR.

Investors dumped bank assets seen as among the most vulnerable to an economic downturn, pulling a record $3.3 billion from financial sector stocks and $2.9 billion from bank loans.

The sharp reassessment of risk in markets comes after the Fed spooked investors by raising interest rates and sticking by a plan to keep withdrawing support from an economy it views as strong.

Investors pulled $8.3 billion from equity funds this week, though that was composed of $27.7 billion of mutual fund redemptions tempered somewhat by $19.4 billion into ETFs.

In fixed income, emerging market debt saw its 11th week of outflows ($2.0 billion), while high-yield bond funds lost $3 billion and investment-grade bond funds had "massive" redemptions of $5.5 billion.

"We strongly believe liquidity & credit = "glue" for bull market and both have cracked in 2018," wrote strategists at the U.S. bank.

BEAR-Y CHRISTMAS

This year has been disastrous for global markets which have lost $16.7 trillion in market value -- equivalent to the European Union's GDP, the BAML strategists wrote.

The last year when cash had positive returns while all three of equity, credit, and government bonds were in the red was 1969.

Investors will see 2018 as a year to forget as many entered it in an optimistic mood, only to be disappointed by sluggish growth, an escalating trade war and political turmoil.

European stocks, which have been in the firing line throughout the year as investors fled the region facing uncertainty over Brexit, wrangling about the Italian budget, and a global trade war, suffered their fourth biggest outflows ever.

Some $5.4 billion flowed out of European equity funds over the past week.

U.S. equities saw more modest outflows with $4.4 billion pulled from the region.

Sector flows also painted a picture of risk aversion with only utilities, seen as a "defensive" sector in times of market stress, enjoying modest inflows of $500 million.

Materials, consumer, healthcare, real estate, tech, and energy sectors all had outflows of between $0.5 billion and $1 billion.

The financials sector was the worst-hit.

The only silver lining was the resurgence of emerging market equity funds, which had their biggest inflows since February with $4.5 billion added to the asset class.

That took the ten-week total inflows to $21 billion as investors turned more optimistic on emerging markets which have suffered this year from a potent combination of a strong dollar, global trade war and decelerating China.