Prieur Perspective: Goodbye Safe Havens, Hello Risky Assets

“Goodbye safe havens, hello risky assets.” This was the investors’ theme song during the past week. Safe-haven assets were out of favor, as better-than-feared corporate earnings and signs of a budding economic recovery emboldened investors’ appetite for reflation trades such as equities and commodities.

Investors’ sentiment improved notwithstanding a number of influences that could potentially disturb financial markets. These included a 3-day delay in the release of the stress test results of the 19 biggest US banks until May 7, the plight of the beleaguered US automakers with General Motors (GM) proposing a sweeping debt-for-equity restructuring and Chrysler filing for Chapter 11 bankruptcy protection, and fears of an escalation in the number of swine flu (H1N1) cases.

As to be expected given the countless catalysts, the past week’s trading was bumpy, but the major global stock market indices nevertheless managed to resume their 8-week rally. Further testimony of investors’ zest for risky assets came from the following:
 

• a solid performance by crude oil, base metal and agricultural commodities (with the exception of pork bellies and lean hogs - despite the fact that humans cannot contract swine flu by eating pig meat)
  
  
  
• tighter credit spreads (especially high-yield corporate bonds)
  
  
  
• a jump in Treasury Note yields to levels last seen in November a decline in the US dollar and Japanese yen as traders switched to high-yielding currencies such as the Australian dollar, New Zealand dollar and South African rand (all resource-linked currencies).