Risk Aversion or Fed Policy

Macro Perspectives: Fri 18 Feb 22

Last Friday, a wave of risk aversion hit markets after the White House postured over a potential Russian invasion of Ukraine.

The outlook since, for such an event, has been unclear and confusing at best.

Let's take a look at the behavior of markets for any signals on whether or not a serious conflict may be imminent.

What happened last Friday, following the White House warnings? There was aggressive buying in the safe-haven assets. Treasury prices jumped (price higher, yields lower), Gold jumped, and oil prices jumped, on the potential for a supply shock.

What happened yesterday? For a second time in less than a week, money moved out of "risk assets," like stocks, and into Treasuries. Gold traded to the highest levels since June of last year (over $1900, and marching toward record highs).

Oil was down - that doesn't square with an increased chance of a war (especially involving the third largest oil producer in the world).

With that in mind, remember from my note on Monday, Bitcoin moved lower on the "risk aversion" trade - it did so again.

This is an asset thought by many to be the "new gold," and therefore the new store of value/ safe-haven asset. It hasn't performed as such, even in as extreme a case as a prospective World War.

So, with the behavior of oil and bitcoin in mind, we have to consider that this recent market activity may have more to do with Fed policy (i.e. the coming tightening cycle).

Supporting that consideration: The inflated "companies of the future" are continuing to deflate - the manifestation of which is Cathie Wood's ARK Funds (now down 57%).

As we discussed in my January notes, the "money of the future" (i.e. bitcoin) appears to be highly correlated.