Safe-haven assets like gold and Treasuries rise on new European tariff threats and high expectations that the Fed will cut rates
- Safe-haven assets have edged higher again as the US threatened new tariffs against Europe.
- In addition, central banks have been increasingly dovish, signaling rate cuts.
- The yield on the 10-year Treasury note has also fallen below 2% again, pricing in a rate cut from the Fed.
- Read more on Markets Insider.
Safe-haven assets have had quite a week.
On Wednesday, gold edged back above $1400, a key level for the precious metal. In addition, the 10-year note's rally continued and sent yields below 2% again - when bond prices go up, yields go down.
This all happened days after the assets slid on news of a trade truce between the US and China at the G20 summit over the weekend. Trade tensions intensified again shortly after, when Trump threatened tariffs on European goods following disagreements over airline subsidies.
Now, safe haven assets are back on the rise.
"This is the right environment for gold to thrive and flourish," Lukman Otunuga of FXTM told Markets Insider in an interview. He's long been bullish on the asset, he said.
Going forward, traders will be looking for even higher gold prices after the precious metal closed about $1400 in June. Now, it's likely to stay above that level. And the sky's the limit for monthly closes for the rest of the year, Otunuga said.
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This is because amidst the trade tensions that have been driving markets, central banks across the globe have been increasingly dovish and willing to aid global markets and the global economy, Otunuga said.
"We have a chorus of central banks actually signaling an interest to come to the rescue," he said. This would mean cutting interest rates. Gold is seen to be appealing in low-interest-rate environments because it holds its value well.
The dovish sentiment coming out of the European Central Bank and the Federal Reserve is also seen in the bond market, which has priced in rate cuts for some time. While a rate cut would be a sign that the global economy is indeed slowing, if central banks start to cut interest rates, they would hopefully give markets the boost they need.
This scenario might explain some of the disconnect seen between the bond and equity markets. As bonds have rallied, so have stocks- the S&P 500 rocketed to a record high Wednesday. It is counterintuitive to see rallies in both stocks and bonds simultaneously.
"It's a little hard to label it as a flight to quality type of bid as the stock market is at record highs," Mark Heppenstall, the chief investment officer of Penn Mutual Asset Management, told Markets Insider. Instead, he sees the movement in the bond market as more tied to dovish Fed policy and the likelihood that the central bank will cut interest rates this year. In the US, this is particularly important as the expansion from the great recession is now the longest ever.
The length of any expansion doesn't necessarily point to an upcoming recession, but longer recoveries can start to spark fears that one is on the horizon. If the Fed does step in to stimulate the economy and keep the expansion running, that could be very positive for equity markets.
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