What is driving risk appetite in the financial markets?
An overview of the current environment in the financial markets
Despite the havoc caused by the coronavirus, forcing authorities around the globe to almost completely shut down their countries and leading to the greatest peace-time economic contraction within living memory, the trading agenda has been dominated by a positivity that many find bewildering. Why is there such a discrepancy between the performances of Main street and Wall street? The answer lies in a combination of factors.
Firstly, I would highlight the timely and decisive intervention by central banks and governments. Authorities provided a safety net of subsidies to individuals and businesses that avoided the economic collapse. At the same time central banks' easing of monetary policies and asset purchase programs, provided stimulus and a back-stop to the credit risk facing large corporations.
At the same time, with hundreds of millions or workers furloughed or working from home, the digital sector become the first winner of the coronavirus era. Online shopping, streaming services and other digital services benefited greatly from the home confinement imposed on entire populations. This also contributed to the risk-on sentiment dominating the markets, because the digital sector today represents more than 20% of the S&P.
But not all is rosy in the financial markets. There are some dark clouds looming in the horizon; The risk of second wave of COVID-19 remains real and, should it happen, its not guaranteed that authorities would be able to sustain the levels of social and economic support provided in the aftermath of the first wave.
Another major threat to the growth of the global economy is the latent conflict between the US and China. The two main global powers appear to be increasingly hostile towards each other, with the rivalry manifesting itself through trade, tech and geo-political tensions.
The growing threat posed by an increasingly assertive China, to the global supremacy of the United States, threatens the international order that prevailed since the end of World War II. It seems that we are moving towards a polarised world, with two giants competing for domination in a dangerous game that may dictate the end of globalization and bring international trade to an almost standstill.
Amidst the turmoil caused by the global pandemic and the rising Sino-American tensions, an old favourite has kept its sparkle. Im talking about Gold, of course. The precious metal continues to outshine other investment instruments, quickly approaching the all time high of $1,917, reached in August 2011. The most remarkable aspect of Gold's performance is the fact that it occurs during a bull market, which is unusual. Perhaps this a sign that many investors are hedging their bets, and, despite the apparent optimism, we aren't yet out of the woods.
This article was written by Ricardo Evangelista, ActivTrades Senior Analyst.