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Haven assets rally as nerves hit US markets

Haven assets such as US government bonds, the yen and gold rallied sharply on Tuesday, while and the US “fear index” crept up to its highest level since the US presidential election in November, highlighting nervousness in global markets following a long period of tranquillity.

The Vix index, a gauge that measures the expected 30-day volatility of the S&P 500 as implied by derivatives prices, was remarkably quiet in the first three months of the year, shrugging off the political noise from Washington DC. But after trading below 12 for most of 2017, the index has been climbing steadily this month, and on Tuesday shot up above 15 for the first time since November 9.

Safer assets that typically rally when investors are nervous also rallied on Tuesday. The 10-year US Treasury yield fell 7 basis points to below 2.3 per cent, the price of an ounce of gold rose by the most in a month, and the Japanese yen jumped against all major currencies. The FTSE All-World equity index fell 0.3 per cent to its lowest since mid-March.

“We’re seeing investors get a little nervous. It doesn’t mean at the end of the day we won’t be unchanged, but right now there is some headline fear,” said Andrew Brenner, head of international fixed income at National Alliance, pointing to concerns over Syria and North Korea.

Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, said the recent rise in Vix was primarily due to nervousness over the French presidential election later this month, with the gauge belatedly catching up to its European counterpart’s worries over the potential outcome.

But unease has also been simmering among some investors that markets are set for a correction after one of the calmest quarters in decades. Evidence of stronger global economic growth has counteracted fading optimism over the mooted economic policies of US President Donald Trump but, with equities trading at lofty prices, some fund managers warn that plenty could go wrong.

“Valuations are high, and there’s scope for disappointment,” Michael Roberge, co-CEO and chief investment officer of MFS, the US mutual fund manager, told the FT recently. “We’re trying to lean against the market.”

The S&P 500 dropped 0.6 per cent by midday in New York, while gold rose 1.4 per cent to hit $1,292.14 a troy ounce, its highest since the week Mr Trump was elected in November. The precious metal is up 11 per cent so far in 2017, recovering after tumbling in the final months of last year.

Oil, which has rallied by around 12 per cent in the past two weeks on signs that supplies are finally starting to tighten, was also caught up in the sell-off. Brent crude oil, the international marker, dropped 0.76 per cent to $55.59 a barrel while US benchmark West Texas Intermediate dropped 0.5 per cent to $52.82 a barrel.

Nonetheless, as long as global economic growth stays steady and central banks remain cautious on tightening monetary policy, most investors expect any market squalls to be transitory. The upcoming corporate earning season, which kicks off with JPMorgan on Thursday, is also expected to produce more good news for investors.

“For a meaningful drawdown we’d need to see an end to the global synchronised recovery. The politics doesn’t matter,” said Krishna Memani, chief investment officer of OppenheimerFunds. “The story for markets for the rest of the year is that underlying growth stays steady and doesn’t change that meaningfully.”

Mr Brenner also said that market movements have been exacerbated by lower trading in the week before Easter, with some investors paring back their positions ahead of public holidays on both sides of the Atlantic.

“You’re going into a long weekend and there won’t be any liquidity from tomorrow afternoon. There will be a very long time before you get liquidity again,” Mr Brenner said. “The flight to quality trade is there but it’s not panic. There isn’t a lot of liquidity to countertrade it.”