I've read the news many times but still can't tell the difference between risk-on and risk-off sentiment in the market. What is so important to know about this?
Let us explain!
Market sentiment is the overall feeling or attitude of investors towards the market or a security, which translates into market movements whether stocks, forex or bonds.
There are several factors that determine market sentiment:
The current state of a country's economy
Geopolitical events
News about individual companies or sectors
Risk-on and risk-off refer to changes in investment activities due to the current situation in the global economy.
Risk-on
Risk-on means the market is in a positive mood which means investors dare to take risks.
This situation can be seen in the 'green' stock market, all up!
For example, let's say that lately there has been a lot of positive news about the economy in the United States. The job market is strong, corporate profits are up and interest rates are low.
As a result, investors will feel optimistic about the future and be willing to take more risks by investing in stocks.
In terms of the currency market, traders may choose to 'buy' high-return currencies such as Australian and New Zealand dollars.
Risk-off
Risk-off is the opposite of risk-on, and this means that markets in a negative mood cause investors to move to safer places.
For example, there have been some negative issues lately about the economy in the United States. Unemployment is high, corporate profits are down, and inflation is soaring.
As a result, investors will feel pessimistic about the future and avoid taking risks, causing them to be more inclined to invest in safe-haven assets such as bonds or gold.
In terms of the currency market, traders may choose to 'buy' yen and swiss francs.
In certain situations, the US dollar can also be a safe-haven currency. Why? Huh. We will talk about this in another article.
After researching and digesting the above explanation, what do you get?
By knowing this, investors will be able to better understand why the market behaves the way it does.
Not only that, it will also help you to manage risk and emotions better in making an investment.
