Market sentiment – Risk on and Risk off

Risk on – refers to the market sentiment in which traders and investors in the financial market are taking on riskier assets such as AUD, NZD, EUR, CAD

Risk off – refers to the market sentiment in which traders and investors in the financial markets are selling off ‘riskier assets’ and start pouring in money in ‘safer’ assets. Such as JPY, CHF.

What is ‘Risk on’?

When market participants are optimistic about the outlook for the economy, they will drive the price higher for riskier assets – this is whats called a ‘risk on’. When traders say they’re in a risk on market sentiment, they’re generally buying risky assets. Such as

• Currencies – AUD, NZD, CAD, and NOK. Emerging markets – MXN, ZAR, TRY, and BRL.
• Commodities – Metals (Copper) and energy (Oil).
• Bonds – ‘lower-rated but higher-yielding’ corporate and sovereign issues are considered risk on asset.
• Stocks – stocks in industries which are dependent on economic growth.

What is ‘Risk Off’?

When Market participants are pessimistic about the outlook for the economy, or unexpected news comes out – anything hugely negative or any uncertainty, traders will often times sell riskier assets and opt to buy safe haven assets instead. – when traders say risk off, they’re selling risky assets and buying ‘safer’ assets or even cash.

• Currencies – U.S Dollar, Japanese Yen and Swiss Franc tends to rally.
• Stocks – Should expect stocks to suffer across the board.
• S Stock indices such as SP500 and DJ30 as see if they’re trading at a lower price to confirm how strong the ‘risk off’ sentiment is.
• Bonds – U.S treasuries and German Bunds as they’re seen as almost risk-free.