Article / 22 August 2011 at 8:44 GMT

Investors' confidence crisis!

During these times when investors await the oxygen masks to drop from the ceiling as markets tumble southward, the latest plague appears to be a 'crisis in confidence'. This has led investors to seek investments that provide some level of comfort and a ‘sound night's sleep’ - e.g. government bonds and gold.
 
Chart 1 highlights investors' flights to safety, and inherent lack of confidence, as shown by the decrease in German Government bond yields (10YR bund). This rush for cover has resulted in yields falling to levels (2.085%) not seen before (based on data going back as far as 1989)illustrating the lower returns investors are willing to accept given the present market climate. 

Furthermore chart 2 echoes this view with gold reaching new record highs.

Chart 3 illustrates the volatility in the market driving investors to scramble for so-called ‘safe haven’/’sleep well’ investments, like the German Bund, T-bills and gold. However, the VIX remains well below the levels experienced during the recent financial crisis but is still significantly high.


It would be fatuous of us to try and call the bottom of what is an uncertain market environment and thus, err on the side of caution encouraging investors to ‘keep their powder dry’ as one should not underestimate the ability of the market to respond to positive macro developments (however unlikely they may seem at present), resulting in what will hopefully be a well-earned recovery.

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