Investors pile into safe havens ahead of the weekend
By Arnaud Masset
Investors are switching to risk-off mode, fleeing into safe haven assets. Gold reversed early-week losses, rising more than 2% since Tuesday. Demand for treasury bonds soared. 10-year German Bund yields dipped to 0.40%, while the 2-year slid to -0.71%. So did demand for higher yielding currencies such as the Aussie and the Kiwi. AUD/USD rose 0.45% while NZD/USD was up 0.50%. The Japanese yen was up 0.40%.
Financial markets are ending the week on their back feet, as US political turmoil continues. Wall Street suffered its worst sell-off since May: the Dow Jones Industrial Average fell 1.2%, the S&P 500 declined 1.5% and the tech-heavy Nasdaq tumbled 1.9%. After an ISIS terror attack in Barcelona, the sell-off spread to European stocks on Friday, with the Eurostoxx 50 receding 0.90%, the DAX sliding 0.75% and the CAC 40 off by 1%.
Investors are always reluctant to hold risky position over the week-end. This is understandable, because Trump’s political turmoil might well cause the markets to overreact on Monday, should the chaos worsen over Saturday and Sunday.
Japanese yen to keep on strengthening
By Yann Quelenn
Over the past month, the JPY has risen in value from 114 to 109 per USD, and we expect this trend to continue. Although there may be some countermoves in the short term, the yen is clearly on a bull run.
Japan’s vicious circle of low inflation and low growth is set to continue. Government bond yields are in steady decline. The 10-year benchmark bond, now at its lowest rate since October 2016, is headed back towards zero. Demand for inflation-linked bonds is weak: markets are expecting low inflation over the next decade!
The Bank of Japan has downgraded its inflation forecasts for fiscal years 2017/18 and 2018/19. Inflating the currency is proving very difficult, and the BoJ will struggle to contain the yen against other currencies, especially against the USD – if President Trump fails to deliver his promised reforms.