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Which Assets are Risky and Which Safe Havens in These Unique Circumstances

Which Assets are Risky and Which Safe Havens in These Unique Circumstances

John Kicklighter,
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Talking Points:

  • Investor sentiment is a constant market force, but it isn't always set on a clear and intense course
  • There are assumptions of 'safe haven' to 'risk' assets that are often overly simplistic, but the categories are truly dynamic
  • Given our current circumstances, the Dollar and government bonds do not represent the reliable safe havens of the past

What makes for a 'great' trader? Strategy is important but there are many ways we can analyze to good trades. The most important limitations and advances are found in our own psychology. Download the DailyFX Building Confidence in Trading and Traits of Successful Traders guides to learn how to set your course from the beginning.

There is always a setting on risk trends for the global financial markets, and the underlying sentiment is always exerting some degree of influence on the assets we trade. When we are the midst of a market-wide rally or full-tilt financial crisis, it is difficult to miss the speculative drive. Panic and greed are the quintessential extremes of the scale and such intensity spreads far and wide. Yet, sentiment has moderate settings as well. Confidence may be warm, pushing investors to moderately higher risk assets with a balance of greater safety and stability. Even when the gauge is set to exact neutral, the gravity of conviction leverages its influence by curbing rampant moves that would otherwise send an asset rallying or tumbling on other fundamental themes. Once we appreciate that sentiment is always 'on' in the markets, we better appreciate when it is shifting to exact true pressure and thereby produce more productive price changes.

The Scale of Safe Havens to High Risk / High Return

Establishing where a particular asset you intend to trade stands on the 'risk spectrum' is useful even when the undercurrent for sentiment isn't in full swing. It can better prepare your for unexpected cross currents. Yet, it can really set up a foundation for opportunities that are truly without equal for fundamental scale. Trends founded on pure risk trends tend to be far more systemic with matching intensity and duration. In the traditional evaluation of what recognizable assets stand where on the scale, the most basic evaluation usually follows the logic that equities are 'risky' and bonds are 'safe'. The most rudimentary portfolios seek a mix of these two assets and sometimes include a third floating exposure from either specific commodities or cash equivalents. With a more experience, the world of viable liquid assets opens up and options for greater safety and greater return increase. For the intermediate market participant, the emerging markets and high yield fixed income ('junk bonds') are more edgy risk assets while the Treasuries, the US Dollar and Gold are my systemic havens. These basic evaluations are not generally wrong, but they can be too stringent. Markets are dynamic with fundamental themes that ebb and flow under different thematic tides. It would be unreasonable to assume that the list of most appropriate candidate on both extremes would change with circumstance.

Current Conditions Create Problems

Our current fundamental setting is quite unique. By most accounts we have seen an extreme and remarkably persistent reach for risk evidenced through the run to record high for benchmark equity indices all the way to the drive for the Euro through 2017 on the basis that distant rate hikes could motivate capital gains. Against this reach, we find economic growth and its outlook are moderate at best for the developed world. This gap in exposure and the most rudimentary measure of 'value' was bridged by extreme monetary policy. That extracurricular support has since been exhausted leaving little recourse for further help should it be needed. And that is a problem as financial risks rise amid populism that takes it forms in events like the Brexit and the US-China trade war. Given the scale of the later enveloping the two largest economies, it is almost impossible to escape the ring of influence.

What are Most At-Risk and Most Appropriate Havens

In our current conditions, some of the traditional assets that we track for oscillations in sentiment are not particularly appropriate for their convenient designation. Given the scale of exposure in risk from a market, government, consumer and business perspective; that is particular true of havens. Most risk assets, in other words, have been pushed to such extremes that they would readily respond to instability. Meanwhile those assets we usually rely on providing us harbor to financial storms can face serious problems. Government bonds for example have been severely warped in their risk standing because of the massive QE that has been employed which warps their response. The Dollar is another instrument that faces issue. Given it is at the center of the growing trade tensions, it can quickly find itself the victim of a coordinated global retaliation. If you're looking for havens to account for our current settings, gold is particularly well suited. Its appeal as a traditional haven is amplified by the fact that it does particularly well when that is paired with a devaluation of traditional 'fiat' assets like currency and government debt. The other overlooked haven better suited to our circumstances is the Swiss franc. Still carrying the market's distaste from failed SNB monetary policy, it nevertheless maintains a neutral stance in financial storms that matches it status in military and policy evaluations. We discuss the changes in risk trends and how we can adapt in today's Strategy Video.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.