A surge in support for Brexit has sent investors racing for financial shelter a week ahead of a referendum that could redraw the political map of Europe.
Many people were taken by surprise when a clutch of polls this month showed support for a British pullout taking the lead in the runup to the tightly fought June 23 vote, analysts said.
The polls triggered a rush to offset the risks of a possible British breakaway from the European Union, they said, with incalculable consequences for a project born out of a determination to forge lasting peace on the continent after two world wars.
Germany's Foreign Minister Frank-Walter Steinmeier on Wednesday even raised the prospect of a Brexit vote eventually leading to the "disintegration" of the bloc, ending a decades-long effort to forge closer relations across Europe.
With no historic precedent, investors found it difficult to assess the risks, said Pascale Seivy, head of investment advisory services at Pictet in Paris, France.
Investors are trying to position themselves to profit in case Britons vote to remain in the EU while at the same time buying "massively" in instruments that will protect them against market declines in case Brexit prevails, Seivy said.
Some speculative funds have ordered their own exit polls on the day of the referendum so as to react before the official results.
- 'Inconceivable' -
"Just a few weeks ago, an exit was inconceivable for many investors," said Renaud Murail, manager at Barclays Bourse brokerage.
But after the latest British opinion polls, European stock markets had declined by seven-to-eight percent on average, Murail said.
"The economic stakes that should be at the centre of the debate in the United Kingdom have been swept away by purely emotional thinking," he said.
Investors had been relaxed about the impending referendum until this month when polls began to show significant gains for the Brexit camp, said Maxime Alimi, economist at AXA Investment Managers.
"The readjustment has been fairly drastic," he said.
On Tuesday, investors for the first time ever accepted negative returns for the privilege of holding Germany's rock-solid benchmark 10-year government bonds, one of the safest investments.
The British pound swooned meanwhile as bookmakers put the chances of Britain leaving the EU at about 42 percent, a sharp rise from just a few weeks earlier.
"It is a classic phenomenon that involves avoiding any risky position," said Franck Dixmier, global director of bond management at Allianz GI.
- 'Harm has been done' -
In any case, Britain's decision to hold a vote on EU membership had in itself had broken a taboo, Dixmier warned. "The harm has been done."
Polls ahead of the British referendum have now become masters of market sentiment, said Greg Jones, managing director at Henderson Global Investors.
"As we come closer to the referendum vote, market reaction really depends on where the polls go with volatility likely rising on any prospect of a leave outcome," he said.
Markets are likely to be volatile throughout 2016, he said, as concern over a Chinese economic slowdown are overtaken by Brexit concerns and later the uncertainty prompted by US presidential elections.
Investors are avoiding risk across Europe, he said.
"People are also expecting a rally if the outcome to the referendum is to remain within the European Union," Jones said.
"I personally do not see that."
Rather, a British vote to remain the European Union is likely to mirror the reaction to the Conservative Party's election victory in Britain last year, he predicted.
"The effect of the general election outcome was that markets rose for half a day and then settled again. There was far less 'feel good' factor from the result than anticipated. Instead, there was the realisation there are a number of issues affecting markets at global level."