Has this week confirmed a longer-term shift into risk assets?

  • This week could be the fifth straight week higher in the S&P 500.
  • Gold has had its worst week since May 2017 falling 3.23%.

Signals That The Risk Theme Has Changed

This week it seems we have seen some serious safe-haven outflows and stocks seem to have benefit.

The chart below shows the spread between the S&P 500 (RED) and Gold (BLUE) for this calendar year.

For a long time, gold was pushing higher in relative terms and it even overtook stocks in late August.

Now it seems the divergence between the two has accelerated with stocks pulling away rapidly.

Now as we are FXStreet how does this relate to the FX markets. JPY and CHF are safe-haven currencies and have massively underperformed.

Both are showing signs of breaking out of technical patterns against the USD and if the risk strength persists this theme could last.

Why Has This Happened?

Well there are a few reasons. After the 2008-9 financial crisis, the worlds central banks took to quantitative easing. Not only this they also dropped interest rates. This pushed up asset prices as lending became cheaper. Why pay dividends to shareholders when you can borrow buy your own stock and keep the returns?

Of course, some companies needed the money for legitimate funding reasons. The fact remains that stock buybacks are at record levels.

Now the worlds central banks have started lowering rates and easing again. This supports stock markets.

The ECB are pumping in eur 20 billion per month and their rates are still negative. The Bank of Japan never stopped QE and now they are said to own around 80% of the countries ETF supply. The interesting thing about this is the fact that they will be pushing supply back to the brokers as the supply starts to wear thin.

The other big news is the trade war between China and the US. 

Tariffs have been added and many issues remain outstanding but one of the reasons the stock market blipped was the increased tension causing slower growth.

As this seems to be unwinding the market are getting more confident that a resolution will be found. 

Every upbeat trade headline that comes out pushes stocks higher. In fact to all-time highs. 

So this coupled with the central bank easing story provide the perfect opportunity for a rally.

S&P 500 vs Gold

Gold vs stocks

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