'Risk Off' Prevails As Geopolitical Risks Increase

 | May 15, 2019 13:35

Markets are not exactly in turmoil today but with geopolitical risks on the rise, they remain in “risk off” mode. Stock indices, commodities and commodity currencies were all falling when this report was written, while gold, yen and safe haven government bonds were on the rise.

To give you an example, the German DAX index was 0.6% worse off after yesterday’s short-covering bounce. Gold was closer to the $1300 handle again and yen pairs were all in the red with the USD/JPY dropping to 109.30 support at the time of writing.

After a sharp escalation in US-China trade tensions, with both nations increasing tariffs on each other, China’s foreign ministry today said Beijing will respond with countermeasures to US “bullying” and that if the US does not want to do business with China, others will fill the gap.

Elsewhere, the US has decided to evacuate all but emergency staff from its embassy and consulate in Iraq. This is in response to rising tensions between the US and Iraq’s neighbour Iran. A senior Iranian official today said Tehran is ready for all scenarios from confrontation to diplomacy.

Meanwhile in the eurozone things are flaring up again, as evidenced by rallying safe-haven German 10-Year bond prices with yields today sinking to lowest level since September 2016 (see chart below). This comes a day after Matteo Salvini, leader of Italy's populist League Party, sent the euro lower when he said his country is ready to break EU fiscal rules governing the size of its budget deficit.

On top of the above geopolitical risks, we have seen renewed weakness in Chinese data overnight while this week’s Eurozone numbers haven’t been too great either.

The world’s second largest economy reported falling industrial production, retail sales and fixed asset investment numbers overnight, raising the prospects of further government support on both the monetary and fiscal fronts. Already hit by trade concerns, the yuan could weaken further and irk the US even more.

Meanwhile today’s Eurozone growth numbers were line with the expectations. Eurozone GDP Flash estimate came in unchanged at +1.2% year-over-year after a first quarter expansion of +0.4%. Germany’s GDP likewise printed +0.4% q/q, which was similar to its Q4 reading and in line with the expectations. Yesterday saw both the Eurozone industrial production and German ZEW come in below expectations.

So, things aren’t looking too great for risk assets. With volatility remaining elevated and markets headline-driven, traders need to remain vigilant and nimble.