Markets go up and down in normal times, and traders like a dose of volatility. Betting on volatility levels has become a market of its own.
For sure, these are not normal times, and worries are growing that extreme financial turbulence may now be feeding on itself. The Covid-19 outbreak has set in motion a massive re-allocation of capital, as investors move money into so-called haven assets: Those thought to be safe in a global economic downturn.
That has brought turmoil in stock markets, record low borrowing costs for the US government and higher prices for gold bracelets.
In the financial markets, the term “haven asset” is applied to a range of assets, primarily those whose values are expected to rise when global market sentiment sours into a so-called “risk off” environment.
Haven assets are also expected to be very liquid, meaning they can be bought or sold in big sizes with ease nearly anytime.
US Treasuries are the global safe-haven asset of choice, as nobody expects the US to default on its debt obligations. America’s ballooning deficit over recent years has created an ample supply of about $16.7tn. The suddenly insatiable demand by worried investors for the securities has sent long-term Treasury yields to all-time lows.
Among the more than $5tn in currencies traded each day, the US dollar, Japanese yen and Swiss franc have tended to be favoured havens (although not always, with the yen going a bit offsides lately).
Gold has long been a haven asset. When the prospect of strong returns elsewhere diminishes – again on “risk off” – gold becomes more attractive as a way for investors to get returns as the world sours.
But there risks when everybody does this at the same time. Behind the rally in Treasuries lurks a potential disaster waiting to happen if any downturn gives way to a rapid rebound; what’s known as a V-shaped recovery. That could send yields sharply higher and make prices tumble.
Every week, economic teams and experts are now downgrading growth outlooks across the world. The US and eurozone’s economies could take until 2023 to recover from the impact of the Covid-19 crisis, according to consultancy McKinsey & Company.
Amid growing uncertainty, it’s now very dicey to forecast how this pandemic will play out on global markets. While the crisis may lead to the deepest recession in modern-day financial history, it could also be the shortest.
All of these lead to an inevitable question for investors: Is any asset really safe?
The standard portfolio where 80% is invested in stocks and 20% is invested in bonds, and watching the money grow at 10% a year, may be over, says Jared Dillian, the investment strategist at Mauldin Economics.
Returns will now be undoubtedly lower, forcing people to save more and consume less. It’s, in turn, is not what is needed for an economic recovery.
