Financial markets tend to display unusual patterns during unusual times. When a risk-off event hits during normal times, traditional safe-havens such as gold will see increased demand. But the escalation in the coronavirus outbreak is so severe that investors have been liquidating their positions in all assets. Gold, the more favourable safe-haven during uncertain times, has fallen almost 10% since March 9th. The yield on the 10-yr U.S. Treasury has also increased. However, the recent increase can in part be attributed to renewed fiscal concerns as a result of fresh fiscal stimulus announced by the US Government.
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Theoretically speaking, we have reached the liquidity trap, as we did during the global financial crisis. Under this condition, the earnings foregone by investing in bonds are almost zero as central banks in advanced economies hit the zero-lower bound, so the preference would be to hold cash. This trend may continue until investors gain confidence in the global economy. Since the coronavirus outbreak has worsened and does not show any signs of abating, risky assets such as equities are expected to remain volatile, and therefore VIX, already trading near its record high, may see a further increase in the coming days.
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