The dynamics of international financial markets since the beginning of April have shown highly anomalous characteristics that lead one to believe that a totally new phase has begun in the correlations between stock markets, fixed income, currencies and safe haven assets.
One might think that the fifteen years that have passed since the banking crisis of 2009, which coincided with extraordinary emergency interventions by governments and monetary authorities, are giving way to a new course in the logic of the global economy. The summary of what happened during this long period that could have come to an end, is summarized in the emblematic phrase pronounced by the then governor of the ECB, Mario Draghi, “whatever it takes”, meaning that the severity of the banking debt crisis that had developed required extreme measures to avoid the possibility of a global depression. So, for more than a decade, various phases of surreptitious creation of liquidity followed one another and for a prolonged period the cost of money was negative, a true aberration of economic rules.
Only the outbreak of the pandemic in 2020 and the subsequent start of the tragic conflict in Ukraine interrupted the long phase of structural deflation of Western economies, creating the conditions for a cost inflation that has partly rebalanced the economic systems, as demonstrated by the normalization of the cost of money which generally returned to positive yields and the adoption of expansionary fiscal policies. Understandably, during this long phase of extraordinary financial maneuvers, the various assets have adapted to this course of events; therefore, the valuations of stocks have in some cases multiplied n times, as the artificially created liquidity, not being utilized by the real economy, has found its way into the stock market. The value of fixed income securities has undergone marked oscillations, first positive and then negative, due to the cost of money initially falling sharply and then, in recent years, constantly rising. In the currency context of the three safe-haven currencies in vogue in 2009, the yen has almost completely lost this characteristic, on the contrary the Swiss franc today represents the maximum expression of the safe currency while the dollar, after a long lateral phase culminating with the highs of 2024, has recently started a rapid decline.
The US president’s decision to implement the tariff hike promised to voters starting April 1st is likely just the trigger for a new course in global finance, as demonstrated by the surprising negative correlation between stock markets, fixed income and the greenback, which, in addition, has not affected the fundamental trend in the price of gold, which has remained positive, while historically the yellow metal was sold during periods of stock market panic due to its high liquidity. In fact, in the past, stock market crashes were accompanied by an increase in the dollar and sovereign public debt, while this generalized decline implies a fundamental upheaval in the rules that have been in place up to now, with the stock market discounting a possible recession and the yield curve steepening markedly in a positive direction. The most obvious explanation could be investors conviction that a phase of normalization of the rules that guide the economy, monetary, fiscal and regulatory, has begun, so that central banks have exhausted their potential to intervene to support financial markets and that the next actors to be saved will be the states struggling with budgets going ever deeper in the red, thanks to post-covid fiscal policies. Therefore, it is necessary to cut public spending and correct the vested interests accumulated over the years thanks to globalization, of which tariffs are a first, partial corrective. The most emblematic evidence is precisely the recent weakness of the dollar and its sovereign debt.
Nicola Bravetti Data Source: Bloomberg
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