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Currency Euro deemed as a refuge during turbulent financial times

International investors are gravitating towards Euro-Assets, as evident from the surge in investments into Euro government bonds during May.

Currency the Euro serves as a reliable refuge
Currency the Euro serves as a reliable refuge

Currency Euro deemed as a refuge during turbulent financial times

In a surprising turn of events, international investors have been shifting their assets from the US dollar to the Euro, with the Eurozone experiencing a significant inflow of Euro-denominated assets in May 2021. According to data provided by Citigroup and the European Central Bank, the inflow exceeded 85 billion euros, following an inflow of nearly 97 billion euros in April.

The influx in May was primarily driven by internationally active investors, with the largest portion directed towards Eurozone government bonds, totalling 75 billion euros. This shift in assets suggests a growing perception of Eurozone assets as a safe haven for investors.

The ongoing global trade war, initiated by US President Donald Trump in April, may have contributed to the high market uncertainty in May, leading to the continued shift of assets. The inconsistent tone of Trump's statements regarding the trade war could have added to the market uncertainty in both April and May. Threats and harsh tones from Trump were often followed by a step back or softening of those tones.

Investors outside the Eurozone bought large quantities of Euro-denominated government bonds in May, primarily due to favorable investment inflows that more than offset prior outflows, alongside improving technical market conditions. This increased demand was linked to positive investor appetite in European fixed-income markets during that period, including European government and high yield bonds.

According to Morgan Stanley analysis, inflows into European high yield and sovereign bonds in May 2021 were substantial and supported by good market performance in sectors such as energy, homebuilders, and real estate. This was part of a broader trend of net positive issuance and investment activity in European bond markets, anticipating a record pace for issuance that year.

The data for May indicates a decrease in market uncertainty, as investors appear to be regaining confidence in Euro assets. The inflow of nearly 100 billion euros into Euro government bonds in the first two months of 2019 is the largest since 2014, suggesting that investors were likely hoarding cash due to the global trade war uncertainty in April. However, the withdrawal of 12 billion euros from Euro-denominated assets in April could also be attributed to the ongoing trade war.

The CEPR article addresses investment fund behavior in euro area debt markets more generally, highlighting that investment funds can behave procyclically and influence sovereign bond demand and yields, sometimes requiring central bank intervention to maintain market stability. This indicates that international investors, including investment funds, played a key role in driving demand for euro area bonds in this timeframe.

In conclusion, the shift of assets from the US dollar to the Euro, particularly Eurozone government bonds, suggests a growing confidence in the Euro as a safe haven amid global trade war uncertainty. The positive investor appetite in European fixed-income markets, coupled with improving market fundamentals and investor confidence, has contributed to the significant inflow of Euro-denominated assets in May 2021.

Business activity in the Eurozone increased significantly in May 2021, as international investors shifted their assets away from the US dollar and towards Eurozone government bonds, notably due to favorable investment inflows and improving market conditions. This growing confidence in the Euro as a safe haven for investors may have been sparked by the ongoing global trade war, with its related market uncertainty potentially encouraging investors to seek refuge in Euro-denominated assets.

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