Stock markets are taking a pounding right now. Where should investors turn? One’s first instinct is probably to look for ten-year Treasuries. However, that safe haven may have finally worn itself out given the current rising rate paradigm. So where should investors turn? Look at short-term (two years and under) securities, both sovereign and corporate. The two-year Treasury yield is now 2.82%, and funds at the very short end of the curve have positive returns for the year even though the rest of fixed income has had a tough time.
FINSUM: Short-term bonds look very favorable right now. Yields are strong and they have little rate sensitivity. So long as one avoids too much credit risk, they look like a good safe haven.
It might come as no surprise, but that does not mean it isn’t noteworthy. Alongside the big surge in volatility this month, gold has risen considerably. The precious metal has risen 3.2% this month to $1,230 per ounce, no small feat considering that stocks initially started falling because of worries about rising rates. Gold has been shunned for most of the year as stocks rose, but is now being sought out as a haven from volatility. An analyst at UBS summarized the situation this way, saying “Price action in the past couple of weeks has shown signs that gold is slowly reasserting its role as a safe haven … In the near term, a pullback in the dollar, weakness in equities and the potential for a soft patch in US data would be upside catalysts for gold”.
FINSUM: Gold rising when the Dollar is strong and rates are being hiked is quite noteworthy. It will be interesting to see how fast gold might fall if this correction in stocks reverses.
Not only did the stock market fall 3-4% yesterday, but something very unusual happened alongside it—yields rose. Historically speaking, it is rare for yields to rise when there is a big stock selloff, as investor generally flee to the safety of Treasuries. Selloffs can portend economic weakness to come, which makes bonds seem more attractive.
FINSUM: This is quite a worrying development and is reflective of the current environment. No one can get comfort from the “safe haven” of Treasuries because it seems very likely yields will keep rising on the back of the strong economy. In other words, there is no place to hide (other than in hedged investments).
Gold has been in an extraordinary multi-year slump. From its peak of around $1,900 a few years ago, the shiny metal has sunk into a multi-year bear market, recently settling at around $1,200 an ounce. However, a couple of factors are coming together that may mean the bad times are over. The first is that there has been consolidation in the mining sector, but secondly, because the pending trade wars have meant that central banks have been buying more gold as a safe haven. This type of demand rose 8% since last year, and gold buying by central banks is off to its best start since 2015.
FINSUM: Unfortunately, we have to disagree with this article. Buying gold as we move into a higher-rate and stronger Dollar period contradicts all the fundamentals of the market. Furthermore, we think if gold was going to benefit from trade war fears, it would have already started.
Something very interesting is happening on Wall Street. Just when US outperformance over global assets has been peaking, US analysts are urging clients to move their money into emerging markets. The catalyst for the recommendations is that the Fed’s tightening cycle is getting more intense, which means US equity values might be peaking before a downturn. That, coupled with currently weak emerging market valuations, means EMs seem to have better upside.
FINSUM: We see the argument, but must disagree. There are two reasons why. Firstly, emerging markets have tended to do badly in periods of rising US rates, and secondly, because EMs will feel the pinch of the trade war, which means their economies are likely to be hurt even more than the US’.