What’s a safe asset now?

Good morning. Armstrong here. Today’s letter is written by my partner on the Unhedged podcast, Katie Martin. She will be popping up once a week or so for the next few weeks, ahead of big, exciting changes coming to this space. So stay tuned, and in the meantime, email us: [email protected].

Safety plays, 2026 edition

The news from Iran over the weekend generated pretty much the market response you would expect from risky assets. There was a bit of weakness in stocks early on Monday, but nothing too dramatic, and US equities ended the day up a bit. Oil rose, but not into the danger zone that could mess up the global economy. As I recently wrote, that’s just not enough to prompt a change of mind from President Donald Trump on Iran. If anything, it’s a bright green light.

As Rob wrote on Monday, that doesn’t mean markets are full of monsters with no capacity for empathy. Judging whether events are good or bad, virtuous or wicked, is just not what markets are for. They certainly don’t act as a gauge of human suffering.

Sticking with risky assets, precedent says they always bounce back from these shocks. “Historically, geopolitical risk events haven’t led to sustained volatility for equities. In fact, 1/6/12 months post these occurrences, the S&P 500 has been up 2%/6%/8%, on average,” said analysts at Morgan Stanley. Of course, the bank stressed, the war could get worse. Oil prices could still hit the roof, and then all bets are off. Gas prices are already off to the races. But so far this is just a blip, oil-market wise, and that’s the bit that matters. From Deutsche Bank:

The reactions in bits of the market that generally do well in times of stress are more interesting. Rates markets in general and Treasuries in particular didn’t like it much (more on that from our excellent colleagues on the news side here), an indication that inflationary concerns trump the desire for Treasuries, in particular, as a haven. This could get very sticky very quickly. Following last week’s higher producer’s prices report, we got a nasty prices-paid reading from the ISM manufacturing report on Monday.

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If inflation does jump in the coming months, good luck to incoming Fed chair Kevin Warsh in steering interest rates down as the president so badly wants.

It’s also notable that, if anything, Treasuries took a heavier hit than other developed market bonds. I’m old enough to remember when Treasuries were the ultimate haven, the safety valve for the rest of the system. Once again, we have an example here of that not working out particularly well. Can’t imagine why . . .

Meanwhile, in currencies, the dollar got a bit of a lift, with the euro shedding a cent or so down to $1.17 and the DXY dollar index also gaining around 1 per cent. But other supposedly “bad-time” currencies — the yen and the Swiss franc — weakened.

The yen really has given up the ghost on this front. At the end of last week, before the bombing of Iran, Rabobank’s Jane Foley noted that the yen was the second-worst performing major currency in the world so far this year, despite a laundry list of global worries that, historically, would have propped it up. Low Japanese interest rates are encouraging investors to use the yen as a funding currency — selling it to buy higher-yielding stuff elsewhere. “Hawkish surprises from the Bank of Japan” would be needed to turn that around, she reckons.

So of the usual candidates to act as a magnet when the going gets tough, the yen is out of action; the dollar is half there but it has, erm, issues; rates are hampered by the potentially inflationary element (and more of those issues); the Swiss franc is at risk of triggering a sense of humour failure from the Swiss National Bank. So the winner is . . .

Gold. At $5,360 or so an ounce, it’s on its way back to the records it set earlier this year. Don’t be surprised if we get back into a heady mix of speculation and a safety scramble and another wave of head-spinning price action.

One other potential reason why safety assets are not screaming higher is that investors are just not all that worried. Every analyst everywhere seems to think this will be a short, sharp conflict with no lasting economic ramifications. As a naturally grumpy person I’m not so sure. It smells of complacency that everyone assumes it will blow over. And as TS Lombard’s Freya Beamish wrote on Monday, “what we’re all worried about is whether we are going to see a repeat of 2022, where both bonds and equities routed as markets deliberated the longer-term energy supply implications”. Fun!

One good read

No crying at the casino ($)