Published On: Mon, Oct 23rd, 2023

Israel-Hamas Conflict: Investors Turn Away from Most Conventional Safe Havens

Israel-Hamas Conflict: Investors Turn Away from Most Conventional Safe Havens
Israel-Hamas Conflict: Investors Turn Away from Most Conventional Safe Havens

The Israel-Hamas conflict has raised concerns among investors, but it hasn’t led to a rush into many traditional safe-haven assets, which typically see significant inflows during times of geopolitical turmoil.

While the human toll of the conflict is immense, the market response has left some analysts and investors puzzled as to why only a few conventional safe havens have experienced increased demand.

Stock market volatility has increased, but the Cboe Volatility Index
which measures expected volatility in the S&P 500 over the next 30 days, is only slightly above its long-term average, remaining just below 20.

Marc Ostwald, Chief Economist and Global Strategist at ADM Investor Services International, suggests that the lack of more significant market volatility and subdued interest in safe-haven assets may be linked, reflecting a sense of uncertainty in the face of numerous complex issues.

“The complexity of the large volume of event risks, whether geopolitical, macroeconomic, or microeconomic, that markets are currently dealing with is truly staggering,” Ostwald noted.

“The fact that volatility hasn’t increased further probably indicates a sense of ‘being rabbits in front of the headlights,’ as well as the reality that many traditional ‘safe haven’ or defensive assets are not living up to their reputation. This includes assets like the Japanese yen
government bonds, utilities, consumer staples, or health care.”

As a result, there has been a “bubblelike” surge in gold

and the Swiss franc

— the two havens that have seen gains since the October 7th Hamas attack on southern Israel.

Gold has risen by more than 7.5% since its October 6th close, while the Swiss franc has strengthened by more than 2% against the U.S. dollar over the same period. However, U.S. Treasuries, considered the world’s risk-free asset, have faced challenges. Yields, which move inversely to prices, experienced a sharp increase, with the 10-year rate
briefly surpassing the 5% threshold early on Monday for the first time since 2007.

Rising Treasury yields and geopolitical tensions are being cited as reasons for a challenging October for stocks. Equities have extended their decline, with the S&P 500
retreating by 8.5% from its 2023 high set on July 31st, although it remains up by 9.8% for the year. Since October 6th, the large-cap benchmark has declined by around 2.1%. The Dow Jones Industrial Average
also turned negative for the year last week.

Interestingly, the Japanese yen, typically a major beneficiary alongside the Swiss franc during times of uncertainty, has remained relatively subdued. The dollar briefly exceeded 150 yen last week, a level that could trigger yen-buying intervention by the Bank of Japan. Analysts attribute the lack of haven appeal for the yen to the central bank’s ultra-loose monetary policy.

Furthermore, even with a conflict in the Middle East, investors are not flocking to buy U.S. Treasuries or government bonds, typically considered the ultimate safe haven due to their denomination in the world’s reserve currency and the backing of the U.S., the leading economic and military power, as noted by Russ Mould, Investment Director at AJ Bell.

Mould offered three reasons that may explain the ongoing Treasury sell-off:

  • There’s uncertainty about whether inflation is cooling. If the conflict leads to a spike in crude oil prices that remains elevated, it could make it challenging to control inflation.
  • Markets are pricing in more than one additional Federal Reserve rate hike, but the first cut is not expected until the summer of 2024 at the earliest. A year ago, the rate-cutting cycle had been anticipated to have already started.
  • The U.S. federal debt continues to grow, with borrowing increasing by $1.6 trillion since the April debt deal. Additionally, the U.S. needs to refinance $15 trillion to $17 trillion of existing debt in the next two years. Meanwhile, 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.

These factors combine to create a list of concerns that could lead to more volatile trading in the near future.

In addition to the Middle East conflict, ongoing tensions in Ukraine, uncertainty around the selection of the next U.S. House Speaker, China’s property market challenges, and U.S.-China tensions related to public sector debt levels in the U.S. and various developed and emerging-market countries are likely to continue prompting market reactions, resulting in ongoing turbulent trading conditions, according to ADM’s Ostwald.

Please follow and like us:

🤞 Don’t miss latest news!

Most Popular News