The distress emanating from global geopolitical developments has made its way down from the general public to the capital markets on both sides of the Atlantic. The intensification of the conflict between North Korea and the US, the increasing tension between the West and Russia over Syria and Ukraine, combined with the uncertainty of the French and German elections has made investors think twice about where they put their money.
This climate of political uncertainty worldwide seems to have prompted investor to pour their cash into “safe havens”, assets that are expected to maintain or increase its value in times of market turbulence and allow to limit exposure during economic downturns.
According to Phillipe Ferreira, Global Strategist Global at Société Générale, traditionally “Treasury bonds or more generally sovereign bonds in G7 countries are considered haven assets because a sovereign default is exceedingly rare”.
However, the performance of this type of safe assets in recent months has become increasingly entangled with some of the political risks in those states.
“On the one hand, over the past month 10- year sovereign bond yields are down 40bp in the US and 30bp in Germany,” Ferreira explained.
On the other hand, French debt has been hit hard by the unexpected rise in the polls of extreme left candidate Jean-Luc Mélenchon only a few days before citizens are set to cast their ballot, raising alarm in the investor community. Both Mélenchon and the extreme-right candidate Marine Le Pen – one of the two favourites to win the first round - are viewed by experts as “threats” to the stability of the entire Eurozone.
And the country is paying the price: the French 10-year bond yield rose 2.5bp to trade at 0.93% this week, while German Bund yields moved slightly lower, settling at 0.18%.
The gap between the two countries is close to a six-week high, as many analysts consider this spread between the French and German debt as a “fear barometer” for investors as the election day approaches.
The yields of France bonds historically have always been close to those of Germany and have long been considered by investors as one of the safest sovereign debts to own, until now.
When in Doubt – Go for Gold
So where do investors go when former “safe havens” no longer seem so secure? In this brave new volatile world, is there even such a place?
During the first months of 2017 some seemed to take refuge in emerging markets, however, with the developed world in turmoil, investors appear to be losing appetite for riskier investments. In the past week, the Brazilian real weakened 0.3% against the dollar, while the Mexican peso, which is considered by investors as “proxy” of other EM currencies, was nearly flat.
According to Ferreira, other FX securities, such as currencies and commodities, are also considered “haven assets” - for example, “the Swiss franc, the Japanese yen and gold.”
This seems to be exactly the horse investors are betting on in recent weeks, as gold rose from US$1 to US$1,275 an ounce, the metal's highest price since November. The Japanese yen hit JPY109.33 per dollar, its strongest since November 18, while oil prices continue to rise with Brent crude up 0.2% to US$56.36 a barrel.
Even if the outlook on currencies and commodities is quite bullish and the rally looks set to continue in the coming weeks, and while challenging political developments unfold in different regions in the world, Ferreira still maintains that sovereign bonds remain the “safest investment” for investors.
While countries like France are now experiencing problems that used to be more closely associated with EMs, investors look set to double down on the remaining safe havens. The concern, though, is about what happens if and when those, too, become increasingly unstable?
