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The Israel-Hamas war makes investors nervous, but hasn’t sparked a headlong rush into many of the assets that traditionally see huge inflows during periods of geopolitical crisis.
While dwarfed by the tragic human consequences of the conflict, the market reaction has left some analysts and investors struggling to explain why so far only a few traditional havens have benefited from a so-called flight to quality.
Stock-market volatility, meanwhile, has risen, but at 20.37, the Cboe Volatility Index
VIX,
an options-based measure of expected volatility in the S&P 500 over the coming 30 days is just slightly above its long-term average just below 20.
Perhaps, argued Marc Ostwald, chief economist and global strategist at ADM Investor Services International, a lack of more pronounced market volatility and subdued inflows into safe-haven assets go hand in hand, reflecting a sense of paralysis in the face of an overwhelming array of worries.
“The complexity of the large volume of event risks, be that geopolitical, macro- or microeconomic which markets are confronted with at the current juncture borders on the mind boggling,” he said in a Monday note.
“The fact that volatility has not picked up even more than it has probably attests to an element of ‘being rabbits in front of the headlights’, as well as the fact that a good many traditional ‘safe haven’ or defensive assets’ are anything but,” including the Japanese yen
USDJPY,
government bonds, utilities, consumer staples or health care.
In turn, he said, that has created “bubblelike” flows into gold
GC00,
and the Swiss franc
USDCHF,
— the two havens that have rallied since the Oct. 7 Hamas attack on southern Israel.
Gold was up more than 7.5% from its Oct. 6 close through Monday, while the Swiss franc strengthened more than 2% versus the U.S. dollar over the same stretch. But U.S. Treasurys, viewed as the world’s risk-free asset, have suffered. Yields, which move opposite to price, continued a sharp rise, with the 10-year rate
BX:TMUBMUSD10Y
briefly topping the 5% threshold early Monday for the first time since 2007.
Rising Treasury yields and geopolitical angst are blamed for a rough October for stocks. Equities have extended a pullback that’s seen the S&P 500
SPX
retreat 8.5% from its 2023 high set on July 31, leaving it up 9.8% for the year to date. Since Oct. 6, the large-cap benchmark is down around 2.1%. The Dow Jones Industrial Average
DJIA
turned lower on the year last week.
The Japanese yen, typically the biggest haven beneficiary alongside the Swiss franc during periods of uncertainty, has been left on the sidelines. The dollar briefly fetched more than 150 yen last week, a level that risks yen-buying intervention by the Bank of Japan. The central bank’s ultraloose monetary policy explains the yen’s lack of haven appeal, analysts said.
Meanwhile, “even a war in the Middle East is not persuading investors to buy US Treasuries, or government bonds, an asset class that is usually seen as the ultimate haven because they are priced in the world’s reserve currency and come with the backing of America, the world’s leading economic and military power,” said Russ Mould, investment director at AJ Bell, in a note.
He offered three reasons that may explain the continued Treasury selloff:
- It isn’t certain that inflation is cooling. If the conflict forces crude prices to jump and remain elevated, it will make it more difficult to rein in inflation.
- Markets are pricing in more than one more Federal Reserve rate hike, but the first cut isn’t seen until summer 2024 at the earliest. A year ago, the rate-cutting cycle had been expected to have begun by now.
- U.S. federal debt continues to mushroom, with borrowing up $1.6 trillion since he April debt deal. On top of that, the U.S. needs to refinance $15 trillion to $17 trillion of existing debt in the next two years. And the Federal Reserve is unwinding its balance sheet, which means it’s no longer a “price-blind buyer of last resort” when it comes to Treasury supply.
It all adds up to a laundry list of worries that may make for more unsettled trading in the near future.
Alongside the Mideast conflict, the continuing war in Ukraine, the “debacle” around the selection of the next speaker of the U.S. House, China’s property woes, and U.S.-China tensions tied to concerns about the level of public sector debt in the U.S. and developed and emerging-market countries will likely provide more “key prompts for markets to react to, in what will remain choppy trading conditions,” said ADM’s Ostwald.
