Global money moves between two moods. When investors feel confident, they buy riskier assets for higher returns: risk-on. When they're worried, they sell those and pile into safer ones: risk-off. Recognising the mood helps explain why unrelated markets suddenly move together.
Signs of the mood
| Indicator | Risk-on | Risk-off |
|---|---|---|
| Stock indices | Rising | Falling sharply |
| VIX | Low and falling | Spiking |
| AUD/JPY | Rising | Falling fast |
| Gold, yen, Swiss franc | Flat or weaker | Stronger |
| US Treasury yields | Rising (bonds sold) | Falling (bonds bought) |
Why safe havens rise
- US Treasuries and the dollar: the deepest, most liquid safe asset in the world.
- Japanese yen: Japan's low rates make the yen a funding currency for carry trades. When carry trades unwind, yen is bought back.
- Swiss franc: a long history of stability and a strong current account.
- Gold: no counterparty risk, held for thousands of years as a store of value.
Key takeaways
- Risk-on means confidence: stocks, commodity currencies, crypto and oil tend to rise.
- Risk-off means fear: Treasuries, the yen, the Swiss franc, the dollar and gold tend to rise.
- The VIX and AUD/JPY are quick gauges of the mood.
- The relationships are tendencies that can break in unusual crises.