The massive losses in oil prices and U.S. and European equities were not countered by gains in traditional safe-haven assets on Wednesday.
Why it matters: The unusual movement in typical hedging tools like bonds, precious metals and currencies means they are not providing investors an asset that will appreciate in the event of a major equity selloff.
- That could be a serious threat to savings and retirement portfolios, which are built to minimize losses by investing in a combination of stocks, bonds and other assets that are supposed to provide a safety net.
- The erosion of these correlations has boosted the popularity of so-called buffer ETFs, which function almost like annuities for stocks, and cash among investors.
What's happening: The S&P 500 fell 3.5%, its largest drop since June 11, and the Nasdaq fell 3.7%, outpacing earlier losses in European stocks as France imposed a new nationwide lockdown and Germany moved to implement one-month partial restrictions.
- The pan-European Stoxx 600 closed 3% lower.
- The Cboe's volatility index jumped above 40, reaching its highest since June.
- Brent crude oil prices fell by more than 5%, and U.S. West Texas Intermediate (WTI) crude dropped by 6%.
What they're saying: "Risk sentiment took a nose dive on Wednesday amid more concern around the spread of COVID-19 and renewed restrictions in Europe,"ANZ analysts wrote in a note. "This was seen alongside ongoing concerns about failure to agree on U.S. fiscal aid before the election next week, adding to a weak economic picture."
The other side: Treasuries were flat on the day, even though yields have risen significantly since the beginning of October.
- Gold fell by 1.7% in spot markets.
- The Japanese yen gained just 0.1% on the day.
- The dollar, which proved to be the world's most popular safe haven during March's market meltdown, also was little moved against most currencies.
Reality check: "An important nuance is that the risk-off move in the equity market also interacts with the presidential election and the likelihood of additional future lockdowns," Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote in a note to clients.
- "As Biden's odds of winning the White House are rising, so too are the chances that some form of additional lockdowns (be it targeted or broad-based) may occur this winter/spring; after all, the Democratic nominee has previously expressed a willingness to impose lockdowns if recommended by scientific advisors."