Riskelia's blog

The global asset deleveraging: is there any “safe haven” left?

Posted on 04. juin, 2010 by Jean Jacques Ohana in Weekly Focus | 2 comments

Despite the recent risky assets’ rebound, assets linked to the Chinese growth have remained very weak in the recent days: in particular, the Chinese stock market and base metals are now in a bearish trend. What is more worrying is the synchronization of the trend indicators across different asset classes as demonstrated by the chart below taken from Riskelia’s Market Radar:

This pattern is revealing of the systemic nature of the current crisis where every link of the financial has been infected from sovereign debt to carry trades, emerging debt and equities.

At this stage, a long bias on asset classes is highly dangerous and stress tests have to be increased to reflect the accumulation of nervosity within the financial system, as far as sovereign risk, the banking system, the Chinese real estate and the depressed commodities complex are concerned.

Which asset to hold in such a financial turmoil? Cash holding is a must even if it does not pay a high return in the short term. For sure, gold could serve as a hedge against a currency debasement which would be provoked by the monetization of the public debt in Europe, UK and the US. However, it has to be borne in mind that gold may be subject to deleveraging should investors dump commodities indices from their portfolios.

In any case, sovereign debt could not be used as a hedge this time. Let’s have a look at the most significant financial bubbles as of  June 4:

They mostly concern sovereign debt supposed to play the role of safe havens in the face of Greek, Portugal and Spanish solvency issues. We can see that Italian bonds, after benefiting from the defiance towards the Greek, Spanish and Portuguese debts, have been subject to a sharp deleveraging. Very soon, the French debt will be under attack, an outcome which is all the more predictable in that the French government bonds are presently the target of a massive positioning bubble. Needless to say that the German 2 Year bond is not a great deal at yields under 0.50% when the ECB refinancing rate is at 1% and keeping in mind that Germany serves as the guarantor of last resort of the least solvable countries in the Euro zone.

Tags: Base Metals, Chinese Growth, Chinese Stock Market, Debasement, Emerging Debt, Financial Bubbles, Financial Turmoil, Global Asset, Government Bonds, Market Radar, Monetization, Risky Assets, Safe Havens, Sovereign Debt, Sovereign Risk, Stress Tests, Systemic Nature, Target, Trend Indicators