LONDON Euro-denominated assets are getting the cold shoulder from markets as worries about the stability of peripheral euro zone economies increase, but there is little sign so far of any mass flight by long-term investors.
This may bring comfort to euro zone governments as they struggle to contain the debt problems of Greece, Portugal and Spain. It does mean, however, that there is a wall of money which could still respond to the crisis if it escalates.
The latest flow figures from fund tracker EPFR Global actually show a small net inflow of $861 million into European equity funds, including Britain, in the week to February 3, with flows to Germany and France prompted by more attractive valuations created by a lower euro.
Data held by State Street, meanwhile, contains no obvious evidence of an institutional exit from euro zone assets; the flows which are occurring appear to be no more defensive than those being seen elsewhere during a period of risk aversion for financial markets around the world.
This suggests that sharp market movements in the past week -- including the euro falling to an eight-month low of $1.3646 on Friday -- are more the result of short-term trading than larger, long-term investment decisions.
"There's a risk of contagion across the euro zone, starting from Greece and moving to Ireland, Portugal and Spain to a degree. It's short-term volatility," said Patrick Smith, senior investment manager at Santander Asset Management.
"We don't see any fundamental moves at all. It's purely speculative, it's the question of unknowns. This is a short-term evolution rather than long-term."
Investors have been short on the euro for some time. Bank of America Merrill Lynch's monthly fund manager poll has shown them believing the single currency to be overvalued since late 2005.
In the currency markets, "put" options, the right to sell the euro, have been more expensive than "calls," the right to buy, throughout 2009 and into this year.
So recent falls by the euro may be unrelated to worries that worsening fiscal problems in the euro zone's weaker members could eventually drive them out of the zone.
In fact, many analysts believe the weak members remain some distance from the pain thresholds at which membership of the euro would be intolerable for them -- and that if the thresholds were reached, rich states would intervene with some kind of aid to keep the zone intact.
None of this is to suggest that large investors are happy with what is going on in the euro zone; the poor economic performance of southern Europe could shave several tenths of a percentage point off the zone's growth this year, and conceivably delay the European Central Bank's decision to withdraw its ultra-loose monetary policy.
Spreads between benchmark German bonds and peripheral-country debt have blown out to as much as a record 405 basis points in the case of Greek 10-year government bonds.
The costs of insuring Greek, Portuguese and Spanish government debt against default all rose to record highs on Friday. Greece's five-year credit default swap price is much closer to Iraq's than it is to Germany's.
The euro has fallen about 4.5 percent against the dollar this year. Euro zone stocks have been battered, with the MSCI Europe exUK index down 6.9 percent for the year.
But many of the moves made by big investors have fit in with other trends. MSCI's all-country world index is down 6.7 percent.
Also, moves out of the euro zone have been underway for a while. The latest data from the European Central Bank, for November, show net portfolio outflows from the region of 10 billion euros in stocks and 5 billion euros in debt.
This was attributed to foreigners selling euro zone debt and euro zone investors buying overseas stocks.
The latest Reuters asset allocation polls, taken in late January, showed both international and euro zone investors cutting back on exposure to euro zone stocks quite substantially. They held an average of 19.3 percent of their stock money in euro zone equities in late January, down from 25.0 percent a month earlier.
But shifts away euro zone debt were less drastic. U.S., British and Japanese investors cut their euro zone bond exposure to 30.9 percent from 34.3 percent, while euro zone investors raised their exposure.
All this points to hot money playing the euro zone crisis while bigger investors make cautious moves that do not depart from normal risk aversion patterns.
Jeremy Beckwith, chief investment officer of Kleinwort Benson, attributes most of the recent market ructions to hedge funds, echoing comments by the prime ministers of Greece and Spain.
"Hedge funds stopped dealing in the middle of November; they are coming back in the new year, looking for something new to play. (Sovereign risk) is the new story to play," he said.
The crisis has nonetheless prompted a number of financial firms to revise their predictions for the euro. Morgan Stanley believes the trade-weighted euro is overvalued by around 19 percent, contributing to the economic strains within the euro area, and has cut its end-2010 forecast to $1.24 from $1.32.
BNP Paribas and Brown Brothers Harriman were also lowering their euro projections.
(Additional reporting by Krista Hughes; Editing by Andrew Torchia)