This strange new world of risk aversion

Tuesday saw some interesting price action; European stocks fell sharply on the back of a few factors and were led lower by Italy’s FTSE MIB, which fell more than 2%. However, at the same time as Italian stocks were being sold sharply, investors were buying Italian bonds and 10-year GBT yields actually fell.

As you can see in the chart below, the FTSE MIB (white line) usually moves in the opposite direction to bond yields (orange line), however today the two have moved together. This could be down to a few factors:

• Italian stocks were hit by a double whammy of pressures, firstly, overall risk aversion triggered by events in Ukraine and secondly, confirmation that the government is planning to overhaul the management structures at some state-owned companies, including changing their CEOs.
• The decline in bond yields (rise in bond prices) could also be down to Ukraine fears as we saw inflows into peripheral bonds today even though European stocks sold off. The Ukraine crisis could be triggering “safe haven” flows into European bond markets.

Who would have thought that Italian and Spanish bonds could be considered a safe haven, especially on a day that the dollar faltered? The markets work in mysterious ways and today’s moves may have been exacerbated by weak volumes in a holiday-shortened week for Europe. We will be watching this closely to see if it continues and if Russian/ Ukraine fears grab the market’s consciousness once more then we may have to get used to some strange moves in the markets.

Figure 1:

Source: FOREX.com and Bloomberg