By John Ainger and Anooja Debnath
(Bloomberg) --It’s the week that brought the stock market to its knees. But while that’s sending jitters across asset classes, there’s still no sign of a widespread flight to safety.
Even as global equities tumbled amid a surge in volatility, signs of risk-off sentiment across currencies, bonds and commodities have remained muted. Haven assets including gold and the Swiss franc dropped, while riskier counterparts such as peripheral European bonds rallied.
The Yield Curve
There’s no indication of a potential inversion of the U.S. yield curve -- often perceived as the harbinger of recession -- in the foreseeable future. If anything, a long-sustained flattening of the Treasury yield curve has been brought to a sharp halt amid the slump in equities.
For James Athey, a money manager at Aberdeen Standard Investments, that’s because investors are picking up on signs that inflation is finally rearing its head in developed economies after years of accommodative central bank policy. The prospect of an inverted curve has been pushed further down the line.
“Piece by piece, the pillars supporting the view that inflation was dead are being chipped away,” Athey said in emailed comments. “The market is having to re-adjust to potentially accommodate a more inflationary world and that means a steeper curve.”
Volatility gauges for U.S. Treasuries, gold and currencies have only increased relatively marginally even as the Chicago Board Options Exchange Volatility Index, or VIX, jumped to a two-year high. That provides a sign of reassurance that the fallout may be limited for investors, according to Tony Roth, chief investment officer at Wilmington Trust Investment Advisors Inc.
The Swiss franc is heading for its worst week in two months against the dollar, suggesting the equity turmoil did little to boost its haven appeal. While the yen rose this week, its gains still fell short of reversing the previous week’s slump.
“This doesn’t seem like your typical risk-off FX market despite what we’re seeing in global equities,” said Viraj Patel, a currency strategist at ING Bank NV. “The contagion effects are fairly muted in terms of size, extent and what would be expected.”
Widely considered one of the safest asset types to own, German bunds languished near multi-year lows this week, while traditionally riskier peripheral European bonds in Spain and Italy climbed. That goes to show that traders are realizing that the era of easy money may be coming to an end, according to Richard Kelly, head of global strategy at Toronto-Dominion Bank in London.
“It’s interest rates in the lead at the moment, so this isn’t an equity slide on risk-off,” he said in emailed comments. “Things are better than expected, to the point where they need to factor in more tightening from central banks.”
That’s not to say non-equity markets are unperturbed. Volatility on junk bonds and emerging-market stocks jumped to a two-year high this week. Still, the iShares iBoxx U.S. high-yield bond exchange-traded fund has extended its outperformance against the iShares Treasuries fund, underplaying any notion of panic.
Gold prices are set for their second weekly decline. Prospects of faster monetary tightening in the U.K. and the U.S. had a greater pull on the precious metal, dragging it to its cheapest level in more than a month this week.
--With assistance from Vassilis Karamanis and Tanvir Sandhu.To contact the reporters on this story: John Ainger in London at [email protected] ;Anooja Debnath in London at [email protected] To contact the editors responsible for this story: Ven Ram at [email protected] Anil Varma