The term “risk off” is used to describe the risk sentiment where traders and investors in the financial market reduce their exposure to risk and focus on protecting their capital.
In a “risk off” environment, you’ll notice prices of safe-haven assets such as the Japanese yen and gold RISING and high-risk assets such as stocks and commodities FALLING.
The opposite of “risk off” is “risk on“.
You’ll often hear markets being described as “risk on” or “risk off.”
They’re both shorthand for global market sentiment.
“Risk On, Risk Off” is also known as “RORO“.
What’s “risk off”?
When market participants are pessimistic about the outlook for the economy, or unexpected news comes out that is super negative or increases uncertainty about the future, market participants will want to sell risky assets and instead, buy safe haven assets.
That’s “risk off“.
When you hear that traders are in “risk off” mode, this generally means they’re reducing leverage, selling risky assets, and buying “safer” assets or even going to cash.
What are typical “risk off” assets?
You should expect stocks to suffer across the board.
A good indicator is to look at U.S. stock indices like the S&P 500 and DJIA and see if they’re all trading lower to confirm just how strong the “risk off” sentiment is.
“Risk off” assets would include U.S. Treasuries and German bunds, because both are seen as (almost) risk-free.
Among currencies, the U.S. dollar, Japanese yen and the Swiss franc tends to rally as traders unwind carry trades.
Carry trades are trades in which Japanese yen is borrowed at a low-interest rate, and then used to buy higher-yielding (riskier) assets in other markets.
Prices of gold usually rise and the yield on government bonds drops.
What’s “risk on”?
When market participants are optimistic about the outlook for the economy. they will bid up the price of riskier assets.
That’s “risk on.”
When you hear that traders are in “risk on” mode, this generally means they’re buying risky assets, usually with leverage.
What are typical “risk on” assets?
For stock traders, stocks in industries that are more dependent on economic growth.
For bond traders, lower-rated but higher-yielding corporate and sovereign issues are considered “risk on” assets.
For currency traders:
- Commodity currencies such as AUD, NZD, CAD, and NOK.
- Emerging market (EM) currencies such as MXN, ZAR, TRY, and BRL.
For commodity traders, industrial metals like copper and energy products like oil.