From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Risk assets are on the ropes after taking a series of heavy hits last week.
Equities have been a sea of red across the board as selling pressure broadens out. Growth continues to collapse, and even many of the latest leadership groups – like banks – are failing to hold their breakouts.
When we look inside the stock market, there's certainly a bear market feel to the price action in recent weeks. For example, offensive areas are being sold indiscriminately while defensive sectors make new relative highs.
But when we look outside the stock market, the story is very different. Despite the volatility, we’re still not seeing much of a bid in traditional safe-haven assets.
In today’s post, we’ll focus on the Japanese yen. But it’s the same story for gold and Treasuries.
Here is a look at all three. From top to bottom, this is the Gold ETF $GLD, the US Treasuries ETF $IEF, and the Japanese yen $JPY:
All three of these assets have been dead money for a long time.
Considering the vigor behind the latest selloff for stocks, you'd think investors would be hiding out in these defensive trades. But that’s not what we’re seeing at all.
In a true risk-off environment, money tends to flow out of stocks and into safer alternatives. While last week was a great example of the former, we haven’t seen any investor interest for defensive assets.
Gold has stopped going down. But, unlike most of its commodity market peers, it hasn’t caught a meaningful bid. US Treasuries continue to be a terrible choice for investors, illustrated by the new lows in IEF.
And the Japanese yen just can’t seem to stop falling, as it trades near fresh five-year lows against the US dollar.
If the world was coming to an end, these assets would be moving up and to the right. Instead, the trends are lower to sideways, at best.
This is simply not the kind of behavior characteristic of a risk-off environment.
Of course, this could change any minute. As such, we want to keep a close eye on these defensive assets for signs of a flight to safety.
Here's a chart of the yen versus developed-market currencies:
The Canadian dollar, the Australian dollar, and the Norwegian krone have all put in lower highs to start off the year, but there’s been no sharp selling in these crosses. These are all sideways trends, nothing that should cause any alarm.
It will be a different story if these commodity-centric currencies roll over versus the yen and take out their respective pivot lows. Stocks and commodities are most likely under increased selling pressure in that scenario.
Whether or not we plan on trading these forex crosses is beside the point. They provide valuable information about how investors are positioning their portfolios.
With risk assets under pressure, we want to know if market participants are putting their defense on the field. The best way to do that is to look outside the stock market to other asset classes that investors look to for safety.
Whether it is the yen, gold, or Treasuries, we’re just not seeing any significant shift toward risk-off positioning yet.
Based on this action, it feels more like investors are calling a timeout and regrouping, instead of bringing in the defense.
