US equity futures are down and safe haven assets have popped on the news that President Trump asked Comey to drop the FBI probe into Russian ties. Risk-off sentiment has appeared in Asian equities, and both Gold and the Yen have seen flows. The moves aren’t massive at this stage, and we won’t know the market significance of the reports until the US opens on Wednesday morning. The potential exists for downside here, if Trump’s role as President is called into question we should expect significant volatility.
What is Risk-Off?
Events which cause high levels of uncertainty can lead to risk-off moves in the markets. If risk-on is when people think “buy equities and look for growth”, risk-off is the opposite. People want protection. Depending on the depth of the problem, risk-off moves can significantly shake the confidence of equity markets and lead to corrections or worse.
Risk-off is when fund managers look to move their assets into “safe havens” such as bonds, and want protection of their assets rather than growth. At it’s extreme, this would see a flood of people looking for the door in equities and moving to cash (or equivalents.)
Assets that typically perform well during risk-off are:
- The Japanese Yen
- The Swiss Franc
- The US Dollar
- Defensive equities (utilities, infrastructure, etc.)
Assets that typically perform poorly are:
- Equities as a whole. Typically you see index’s move lower
- Commodity currencies (CAD, AUD, etc.)
- Emerging markets
Interestingly, the US dollar has been getting pummelled this week. As this problem is very US centric, the typically resilient USD is looking very soft, especially against the Euro which broke through 1.10 on Monday.
What to look for on Wednesday.
- The VIX index. This could be the event which squeezes the VIX shorts and we see a significant expansion in volatility.
- US equities. If equities take a hit into the close, look for continued weakness into Thursday’s Asian session.
- Watch Twitter. It’s a great source of news, especially during quickly moving events and situations.