Euro flows reveal shift in sentiment as losses mount

By Rachel Evans & Andrea Wong

The international appetite for euro- zone financial assets that underpinned the local currency the past two years is beginning to erode.

While broad data showing real-time flows into and out of the region’s stocks and bonds are hard to find, strategists point to items such as U.S. exchange-traded funds, which pulled $1.1 billion from European assets this month, the first outflow since April 2013, data compiled by Bloomberg show. Bonds of Italy and Spain that yielded as much as 7.05 percentage points more than Treasuries two years ago now pay less than their U.S. counterparts, diminishing their appeal.

The result is the euro’s biggest monthly loss since February 2013, and Morgan Stanley said this week selling the 18- nation currency remains the surest bet in the developed world. Rather than a cause for concern, the European Central Bank may see weakness in the euro as a welcome development as it tries to avoid deflation and spur exports to boost the economy.

“The euro is under pressure,” Ian Stannard, the head of European foreign-exchange strategy at Morgan Stanley in London, said in a July 29 phone interview. “Portfolio flows have started to slow down into Europe as yield differentials have come right down.”

Rate Reductions

The euro has fallen 2.1 percent in July, touching $1.3367 yesterday, the weakest level since Nov. 12. It traded at $1.3398 at 12:30 p.m. in Tokyo. Morgan Stanley reiterated its year-end forecast of $1.31 in a July 29 report, and said it expects the euro to weaken toward $1.24 by the middle of 2015. Median estimates of more than 60 strategists surveyed by Bloomberg are for declines to $1.32 and $1.28.

ECB President Mario Draghi contributed to the exodus by cutting...