RORO: Risk on, risk off

Assets are moving in lockstep with each other, which is making life very hard for traders indeed.

The phenomenon of RORO – risk on, risk off – is nicely illustrated in two graphs from HSBC, via alphaville:

What you are seeing is two maps of correlations between various assets, in 2005 and 2012. Dark red means the two assets are strongly positively correlated, dark blue means they are strongly negatively correlated, and turquoise, green and yellow means no real correlation either way.

In 2005, most assets were roughly uncorrelated. Some, like the NASDAQ, S&P500 and Dow Jones, moved in tandem, as did the four key European markets, and the key sovereign and investment-grade bonds. But for the most part, different assets gained and lost value in an uncorrelated manner.

Come 2012, and everything changed. In the top left are all the assets which get stronger in the good times – mostly indexes like the FTSE, but also a few currencies and copper. In the bottom right, there are the assets used to hedge bets when times are rough: the sovereign bonds, the Yen, and right down at the bottom, the US Dollar.

The former class are the risk-on assets; those investors buy when they want to take on risk to make money. The latter are the risk-off assets; those which they buy to get themselves some stability.

The simplified reason for the change is the bimodal nature of responses to crises. When things go wrong, one of two things happen: Governments step in and save the day, or they don't. Quantitative easing is one example of this, but so are bank bailouts, expansions of the "firewall", and so on. If they happen, every risk-on asset rises; if they don't, everything falls.

For those interested, a deeper examination of what RORO means for markets is given by Bryce Elder over at the FT, but the overall problem with the phenomenon is that it reduces trading to a bet on up or down. As a result, traders hate it. As Elder writes, instead of being able to do their job well, by focusing on the fundamentals of each asset they buy (asking questions like "is copper going to be in demand because of growing infrastructure demands"), "each day’s profit or loss is determined to a large degree by results of a sovereign bond auction or comments by a central banker".

Until the crisis is over, though, RORO is sticking around, so investors had better learn to live with it.

Risk on: A trader at the New York Stock Exchange. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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The Republican nightmare shows no sign of ending

The Republican establishment is no closer to identifying the candidate who can stop Trump or Cruz, while Hilary Clinton finds herself in a similar position to Barack Obama eight years ago.

After being cruelly denied by the people of Iowa, we were finally treated to a Donald Trump victory speech in New Hampshire last night. While Trump’s win will come as a “yuge” shock to anyone waking up from a yearlong nap, it was very much in line with more recent expectations. More surprising is John Kasich’s second place finish ahead of the tightly packed trio of Ted Cruz, Jeb Bush and Marco Rubio.

Rubio’s underperforming his polling average by about four points at time of writing (with 89 per cent of precincts reporting) – perhaps partly the natural erosion of his post-Iowa bump, perhaps also due to his mauling at the hands of Chris Christie in Saturday night’s debate. Meanwhile Ted Cruz’s 12 per cent compares favourably with past Iowa winners’ New Hampshire performances: Mike Huckabee got 11 per cent in 2008 and Rick Santorum 9 per cent in 2012, but neither came close to winning the nomination.

The result offers little help to those “establishment” Republicans who’d been planning to coalesce around whichever of Jeb Bush, Chris Christie, John Kasich and Marco Rubio emerged from New Hampshire in the best position.

Christie and Carly Fiorina are probably done. Both got less than 2 per cent in Iowa; both finished in single digits in New Hampshire after focusing heavily on the state; both are stuck at the bottom of the national polls, and neither has raised all that much money (relatively speaking). Christie is heading back to New Jersey to “take a deep breath”, “get a change of clothes” and “make a decision” tomorrow.

But who will party elites rally around to stop Trump and Cruz? Kasich, who came second in New Hampshire but is on just 3 per cent nationally? Rubio, who beat expectations in Iowa and is best of the bunch in national polls but disappointed badly tonight after a terrible debate performance? Or Bush, who’s had more than $75 million spent on him by the “Right to Rise” super PAC with just three per cent in Iowa and 11 per cent in New Hampshire to show for it? Nobody has won either party’s nomination in the modern primary era without a top-two finish in New Hampshire – does either Rubio or Bush really seem like the candidate to break that trend?

Jeb does have plenty of money and organisation, and is guaranteed some extra support from one prominent establishment Republican in South Carolina: his brother. George W has recorded an ad for the Jeb-supporting “Right to Rise” PAC, calling his brother “a leader who will keep our country safe”, which is already running on South Carolina TV (and which ran in New Hampshire during the Super Bowl). He will also join his brother on the campaign trail in the run up to the primary. Bush 43 left office very unpopular and remains the most disliked former President, but he is very popular with Republicans. A Bloomberg/Selzer poll in November found that 77 per cent of them have a favourable opinion of him, making him far more popular than any of this year’s candidates. (Jeb calls his brother “the most popular Republican alive”, which is a bit of a stretch. Nancy Reagan? Clint Eastwood?)

Trump leads convincingly from Cruz in the most recent polls in both South Carolina and Nevada, but there haven’t been any polls from either state since the Iowa caucus. Neither state is as friendly territory for “establishment” candidates as New Hampshire: South Carolina’s electorate is much more evangelical, and Nevada’s much more conservative. Newt Gingrich won South Carolina handily in 2012 and Huckabee came a close second in 2008. Cruz and Trump are doing best with evangelicals and very conservative voters this time around. Thanks to the state’s winner-take-all rules, whoever prevails in South Carolina will get the small ego boost of going into Super Tuesday with the most delegates.

On the Democratic side, Bernie Sanders secured a big win over Hillary Clinton (60 per cent to 38 per cent with 90 per cent of precincts reporting). What seemed incredibly unlikely a year ago has been almost certain for the past week or so. As he heads south and west, though, Sanders faces a new challenge: winning over African American voters.

Just two per cent of those who voted in the two Democratic contests so far have been black; in the next ones that number will be a lot higher. (In 2008, it was 15 per cent in Nevada and 55 per cent in South Carolina). In national polls, Clinton holds a 58-point lead among African American voters compared to her six-point lead with white voters, and she’s 31 points ahead overall in FiveThirtyEight’s average of South Carolina polls (all taken pre-Iowa).

Ironically, Clinton now finds herself in a similar position to the one Barack Obama was in when battling her for the nomination in 2008: heading to South Carolina, having won Iowa but lost New Hampshire, hoping African American voters will help her win big and regain the momentum as we head towards Super Tuesday.