Get used to it

Investors move into "fear-on" mode

Money and moods both move markets. Not much has changed on the cash front in the last few weeks. Interest rates are not rising and the quantitative easing, or money-creation, programmes have not abated. However, the US Federal Reserve has changed the emotional tone. After Chairman Ben Bernanke reiterated his intention to slow QE on Wednesday, investors moved further into what is becoming the new normal mode: "fear-on".

It isn't the familiar move to "risk-off" investments. The prices of assets generally considered safe have fallen significantly. Gold dropped five percent from Tuesday morning in London - when investors started to brace for the next day's Fed press conference - to Thursday morning, when European markets took stock of what Bernanke said. Yields on super-safe 10-year US and German government debt rose by 9.2 and 4.5 per cent, respectively. It certainly isn't the equally familiar move to "risk-on" investments. Equities, the classic risky asset, fell almost everywhere. The MSCI emerging market index, presumed to be high-risk, is down four percent in two days. Commodities have continued their descent. Copper dropped by four per cent, bringing the fall since early April to 11 per cent.

The crude "risk-off, risk-on" dichotomy, which has helped describe markets well for more than a decade, has come to an end. But it hasn't been replaced by a more refined and discriminating approach. Investors, fearing the end of ultra-loose monetary policy, are trying to pull back from any and all assets which central banks have buoyed up - a list that includes pretty much everything.

The fear-on world is gloomy. Five years of monetary extremism have tainted the entire globe's finances. Close analysis of any market is scary. Higher yields could shatter profits, disrupt finances and squeeze funding. There's no place to hide. The real return on cash is negative and every currency is vulnerable. The old market adage can provide a little comfort: sell the rumour, buy the fact. Perhaps the worst will be over by the time the Fed starts to tighten, in 2014. But the wait will be long and painful.