Conventional safe-haven investments are no longer a reliable defense against a volatile market
In a crisis, the answer has never been more ambiguous: where are the safe-haven assets? Gold is typically used as a hedge against market shocks, but since US-Israeli strikes on Iran started on February 28, it has struggled to find its way.
According to James Mackintosh in The Wall Street Journal, gold's issue is that it had already increased by 20% this year, making it "overextended" going into the conflict. For traders trying to raise quick cash, it became "an obvious asset to sell" as a result.
During this war, "it's hard to overstate just how unusual" trading has been. Gold and bonds typically increase when stocks decline. This time, all three assets have collapsed, which is uncommon in history. "Defensive" stocks, such as consumer staples and utilities, typically perform better during periods of market stress, according to Niket Nishant of Reuters. Where else to hide?
Below, the article continues.
Get six free BFIA issues right now.
Get unmatched financial analysis, insight, and professional advice that will help you.
Don't begin your trial just yet. Compared to the 3 percent decline on the broader Stoxx 600 index, European consumer staples saw a 4.5 percent decline last week. The performance of traditional safe-haven currencies has not improved. As bombs were dropped on Tehran, the Swiss franc and the Japanese yen both declined in value.
The US dollar, which has increased by almost 2% against a basket of other currencies over the past month, is currently the only conventional safe-haven asset that has performed as expected. That illustrates how the US is less vulnerable to oil shocks because it exports energy, but even this has an asterisk. Investors are hoarding "short-term dollar cash" while showing no interest in long-term dollar assets like US Treasury bonds, which also experienced a decline.
Gilts' traditional safe-haven assets have been severely damaged.
According to the Financial Times, UK gilts "suffered their worst week" since the pension fund scandal of 2022. It was the worst week for two-year German bonds since 2023. That represents two dangers. First, rising energy prices will cause inflation and postpone interest rate reductions. Pricing indicates that, in contrast to the two rate cuts anticipated a few weeks ago, traders now only place a 50/50 chance on one Bank of England quarter-point rate cut before the end of the year.
Second, worry that the Treasury might be forced to spend "billions of pounds in new support measures" in the event of a significant energy shock. Due in part to the UK's particular reliance on imported energy, gilts have recently underperformed French, German, and US government paper, even though all bonds have sold off. According to Matt Zeigler in Panoptica Money, investors flocked to US Treasuries (as well as other sovereign bonds) in March 2020 when they were afraid of COVID-19.
However, the "safety assets" hierarchy has been "fundamentally reordered" since then. The key Russian banks' exclusion from the SWIFT banking system in 2022 was the pivotal moment. Asia and the Gulf's "surplus capital" holders realized what "happened to Russia could happen to them." When deciding where to store their wealth, they are now opting out of dollar-denominated assets like Treasury bonds.
Leave a comment on: Why investors cannot find safe-haven assets