GRAPH OF THE WEEK: Demand for safe haven assets (gold & bonds) grows stronger

17th February 2020

Source: BlackBee, Bloomberg, February 2020

US stock markets continue to reach new record highs despite the coronavirus outbreak while some analysts are projecting that this epidemic could have a stronger negative economic impact than SARS, not without merit. Many companies, including giants like Apple, are issuing profit warnings as global supply chains are shutting down with unshipped and unsold goods.

Joining US stock benchmarks S&P500 and Nasdaq, a European benchmark, the Eurostoxx 600, also broke new historical highs last week. Chinese major stock index Shanghai Composite, also enjoyed strong rallying this February. While there is a strong upward trend in stocks this year, traders and portfolio managers are also allocating capital to safe havens such as gold and bonds. The gold spot price has finally breached the US$1,600/oz mark last week with the total known gold holdings posting new historical highs.

Demand for bonds has also pushed global yields down, pushing total known negative yielding bonds towards the US$14 trillion mark. This fairly positive economic growth outlook, pushing stocks ever higher, assumes a quick resolution to the coronavirus epidemic (some forecasts suggest the end of March) and accommodative monetary policies of major central banks.

All-in asset allocation to stocks is never a good investment strategy, and this could explain recent strong demand for safe havens. For now both strategies are still enjoying an upward trend.

Cases of coronavirus outside of China on the rise
Four more countries have reported new cases of the covid-19 coronavirus this February, bringing the total number of affected countries to 32. The total number of cases has increased from 65k to 77k last week and the number of deaths reached over 2.2k. Based on reported case figures, the percentage of deaths has increased from 2% three Fridays ago to 2.9% last Friday. While the number of infections and deaths are rising, so is the number of people that have recovered from the virus. Statistics say that close to 20k people have successfully recovered since the outbreak.

South Korea has reported 200 cases alone, while Japan and Singapore have 85 each. While there are currently no reported cases in Ireland, the warning is that it is just a matter of time before it appears and the virus has been listed as a notifiable disease by the HSE. Japan, in particular, is worried about the spread of the virus, as it will play host to the Summer Olympic games in July, where it will see thousands of tourists and athletes descend on the country, before returning home.

Source: BlackBee, RTE, Bloomberg, February 2020

Democratic debates highlight front runners early on
The US Democratic party’s search for a candidate to run against Trump for presidency at the end of this year is well under way. While it is still early days, after a few weeks of voting there are four apparent front runners – Bernie Sanders, Elizabeth Warren, Pete Buttitgieg and Amy Klobuchar, leaving figures like Joe Biden behind.

Of former New-York major and owner of Bloomberg LP, Michael Bloomberg’s bid for presidency, Warren stated that “Democrats take a huge risk if we just substitute one arrogant billionaire for another”. Bloomberg was also criticized for his history of making demeaning comments about women, and for having many non-disclosure agreements with women. So far it looks like either Sanders or Warren are likeliest to land the Democratic nomination, although their chances against Trump are as low as they were for Trump himself in 2016, while chances for the president’s re-election are very high.

Source: BlackBee, The Guardian, February 2020

Source: BlackBee, February 2020

At a glance:

  • EU 7 year budget talks are dominated this year by the deficit left in the wake of Brexit. Without the UK’s €75 billion contribution for the 2021-2027 period, leaders are debating whether or not to cut spending. While the arguments are “respectful” RTE reports that the issue may take more summits to resolve. 
  • India has leapfrogged the UK and France to become the world’s 5th largest economy in 2019. Its annual GDP growth has been 6-7% in recent years, having grown 700% overall since 1995. In spite of this, the World Bank warns that improvements in poverty and sustainability will need to occur to maintain this standing. 
  • US banking giant Morgan Stanley is set to buy online trading platform E-Trade for US$13bn in what will be the largest banking deal since the 2008 financial crisis. 

Source: BlackBee,  RTE, IMF, World Bank, Guardian, February 2020