Global Market Insights

Flight to Quality

Historically, when war has occurred in Europe, international capital has always tended to flee to America. Currently, we can see that the Euro is selling off as the Russia-Ukraine conflict intensifies. We believe this indicates capital fleeing Europe and heading for quality US assets.

Now look at the 30-Year US T Bond (“Bonds”) starting to bounce. As global equity markets have declined, we are now seeing the traditional flight to quality. Capital has started to concentrate in Bonds. They tested the Downtrend Line in February and have now bounced sharply on capital flows rising to test from beneath the former Uptrend Line (see chart below).

There was an important cyclical turning point in February from a timing perspective for Bonds and that seems to have established a low. Yet this was with the Federal Reserve saying they would be raising rates in the US – not lowering them. Normally, we would expect Bonds to decline as interest rates rise but they have now started to move up. This is clearly indicating the “traditional flight to quality” and shift in trend in Bonds caused by the fear of war. Now if we break through that former Uptrend Line this will signal a continuation of trend indicating that this whole affair may be further prolonged.

If you would like discuss further please contact
Blair Kirkhope, Head of Specialist Investments
at blairkirkhope@sequoia.com.au
0414571557 or 02 8114 2203