Okay, what's afoot? Is this a growth in risk appetite, or is it actually risk-aversion? One trend is clear: money is flowing – no, gushing, out of the traditional "safe haven" of US treasury bills, and into equity markets, commodities and all things that can be labelled "emerging market".

This unmistakeable trend is behind the sharp fall in the dollar, which has now fallen 10 per cent in the space of three months on the broadest measure – the dollar index – as this chart from FXstreet.com shows.

On the one hand we can read that as a return of risk appetite as a slew of economic points to the fact that the major Western economies have seen the worst in terms of recessionary contraction. Alternatively, we can view this as risk-aversion, in the sense that the massive state debt burden now sitting on the citizens of the US and the UK in particular promises a huge jump in inflation – and that's a threat most investors would like to avoid.

But rather than try and solve that conundrum, let's look at where the money is actually flowing.

According to Emerging Portfolio Fund Research (EPFR), investors pulled another $22.7 billion (Dh83.3bn) out of safe money market funds during the week ending June 3 – the second largest outflow from what is effectively "cash on deposit" so far this year.

The money is moving towards higher yielding asset classes such as corporate bonds. But it is also flowing towards emerging market equity funds, which EPFR reckons have now seen more than half of the investment lost during the 2008 panic returned. Such funds have seen net inflows of $26bn in the year to date, compared to some $50 million in assets lost last year.

"With currency rather than growth issues on their minds, investors gravitated towards markets with a reputation for fiscal discipline [Asia] or big commodity stories [Latin America, Russia] in late May and early June. Asia ex-Japan Funds posted the biggest inflows in dollar terms, $1.54bn, while Latin America Equity Funds fared best in flows as a percentage of assets under management terms," said analysts.

Brazil has proved particularly attractive, with investors lapping up the prospect of the country becoming a serious oil producer. (See chart)

As for commodity and energy funds generally, the trend is unmistakable. Commodity sector funds saw the largest weekly increase in inflows since February, taking year-to-date inflows over the $6bn mark. (See chart)

However we answer the question over risk-aversion, versus new risk appetite, there seems little reason why this trend should be reversed – at least in the short term. Commodities and energy is both an inflationary hedge and a bet renewed outperformance by the developing world, versus the mature economies of the West. In other words, it's a logical trade.



- Paul Murphy is Associate Editor of The Financial Times.