Why are safe havens and risk assets moving in tandem?

With stocks tumbling over recent weeks, why have we not seen safe-haven assets gain ground?

Source: Bloomberg

The recent deterioration in stock valuations worldwide has understandably shaken up many investors, with many fearing that the sharp declines could be indicative of an impending market decline. However, the behaviour of so-called safe-haven markets provides an insight into the true cause of this current sell-off.

Much of this recent decline is down to inflation expectations, with a jump in average earnings this month raising expectations of Federal Reserve (Fed) tightening. Yesterday’s 0.4% rise in monthly consumer price index (CPI) has brought those same fears back to the table, with the Dow Jones falling 450 points in the immediate aftermath of their release. The rise in inflation and wages highlights that this is a sell-off borne from economic strength rather than demise. This is highlighted by the reaction within some of the main ‘haven’ markets, which has confused many.

One such market has been gold, which has gained 9% over the past month. However, it has been noticeable that while the Dow was losing 1000 points, gold was also falling (rather than gaining) on its safe-haven status. This is a similar story across other haven assets, such as the yen and, of course, bond yields. For one, this points towards the fact that markets were not in fear of an economic crisis. Instead, it highlights the dynamics of a world where rising inflation and rising bond yields erode the attractiveness of holding other assets, such as gold. This highlights the root cause of this recent move, with gold likely to be sensitive to inflation and bond yields. It is notable that while yields have been on the rise, they remain well below the levels seen prior to the 2007/08 financial crisis. Therefore, while we are seeing a strong reaction of late, it may take continued upside for treasuries to truly hit market demand elsewhere.

Interestingly, we are seeing a distinct difference between eurozone and US treasury yield curves, with the steeper eurozone curve highlighting a market feeling that the US economic boost from President Donald Trump will be fleeting, while also raising the likeliness of a debt fueled crisis down the line. Meanwhile, the eurozone is perceived to have a more stable and consistent recovery in play, hence the higher long-term yields on offer. 

Looking forward, the weakness we have seen over the past fortnight is unlikely to mark the beginning of a long-term downturn. However, it is clear that the recent economic strength and rising inflation is causing greater anxiety, given the shift in treasuries. This means that traders will have to keep an eye out for economic data very closely as we go forward, with rising wages, inflation, gross domestic product (GDP) and the like expected to drive currencies higher, yet threaten to send stocks lower once more.

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