Wall Street's 'fear' trade takes hold

Investors are rushing to shed risk from their portfolio amid renewed speculation the U.S. is nearing a military strike in Syria in reaction to the government using chemical weapons against its civilians. The "fear" trade is being driven mostly by the Syrian crisis and U.S. stocks are down more than 1% as investors flock to safe haven assets.

Adam Shell
August 27, 2013
USA Today

NEW YORK -- The flight-to-safety trade is back in vogue on Wall Street.

Investors are rushing to shed risk amid renewed speculation the U.S. is nearing a military strike in Syria in reaction to the government using chemical weapons against its civilians.

The so-called "fear" trade, or "risk-off" trade, is being driven mostly, but not entirely, by the Syria crisis, says David Kotok, chairman & chief investment officer at Cumberland Advisors.

"This is a high-stakes game in a dangerous part of world," says Kotok.

Adds Jim Russell, senior equity strategist at U.S. Bank Wealth Management: "The Syria issue means geopolitical risk is out there and bears watching. Military-related crises tend to play out over days and weeks, so we would look for continued market volatility in the days ahead."

While U.S. stocks, deemed risky in risky times, are down roughly 1% or more Tuesday, assets perceived as a haven have seen a sudden rash of cash flowing their way. Consider:

• U.S. bonds -- Money is pouring back into the bellwether 10-year Treasury note. Its yield, which moves in the opposite direction of price, hit a two-week intraday low of 2.71% -- well below the 2.92% intraday high for the year hit Friday. The drop in yields follows a more than 1 percentage point rise since late May, when the Fed began to hint at easing up on its bond-buying stimulus program.

• Gold --The precious metal was up 2%, about $27, to $1,420 an ounce in morning trading and then eased a bit to $1,416 in the afternoon. This is one of the most commonly used hideouts to park cash when the world gets scary, and financial markets are flighty and stock investors have their finger on the sell button, says Russell. The thinking on Wall Street, he says, is that gold "holds it value" when the so-called fear trade is in play.

• Volatility index -- A closely watched Wall Street "fear" gauge, which measures the amount of volatility in stock action, spiked 13% Tuesday to its highest level since late June. It's the first time this year the barometer has jumped that much in one day.

The price of crude oil jumped, topping $109 a barrel. The futures contract for October delivery was up 2.9% to $109 in afternoon trading on the New York Mercantile Exchange. Whenever geopolitical risk involves the Middle East, supply fears drive the commodity and its energy kin higher.

"Risky assets are under pressure and safe-haven investments are outperforming," Jose Wynne of Barclays told clients in a note. "Overall, global uncertainty has risen, in part, on concern that the U.S. would respond militarily to the conflict in Syria."

Things could get worse as far as Wall Street is concerned. Its wall of worry was already building in recent months as investors try to gauge how the Fed pulling back on its massive bond-buying stimulus program will affect markets.

There are also increased fears about a protracted fight in Congress this fall over raising the U.S. debt ceiling. Before the market opened Tuesday, Treasury Secretary Jack Lew told CNBC that the Obama administration would not negotiate raising the nation's borrowing limit, which could be tapped out by mid-October. Republicans are looking for spending cuts in exchange for a debt-limit increase.

"Congress," Lew told the cable financial news network, "should come back and act."

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