Risk-on and risk-off: what they mean

Two market moods

The terms describe not specific assets but a pattern of collective behaviour. In a risk-on session investors are willing to take on risk in exchange for return: equities rise, credit spreads tighten, emerging-market currencies gain and money leaves safe havens. In a risk-off session precisely the opposite happens.

What makes it interesting is that the pattern repeats across markets with no apparent connection. The same day the S&P 500 rises, European corporate spreads may tighten and the Japanese yen may weaken. It is no coincidence: a common risk-appetite factor moves everything at once.

What moves in each regime

In risk-on, equities rise, especially cyclicals and tech; credit spreads tighten, particularly high yield; commodity-linked and emerging currencies appreciate; and the VIX falls. Government bonds usually fall in price, which pushes their yields up.

In risk-off, money runs towards US, German and Japanese government debt, towards the dollar, the Swiss franc, the yen and gold. Equities fall, credit spreads widen and the VIX spikes. Industrial commodities such as copper usually join the decline because they depend on growth.

The yen deserves a note. Japan kept rates very low for decades, which turned the yen into the cheap currency used to fund positions in higher-yielding assets elsewhere. When fear arrives, those trades unwind and yen must be bought back, which strengthens it precisely when everything else is falling.

When the classification breaks down

The risk-on/risk-off framework works well most of the time, but not always. In 2022 stocks and bonds fell together for months: inflation forced rates up, which crushed bond prices, and simultaneously squeezed corporate earnings. The traditional haven stopped sheltering anyone.

That is why Semavor explicitly watches whether the usual correlations between stocks, bonds, the dollar and oil flip sign. When a stable correlation breaks, the warning is not that the market is rising or falling: it is that the pattern used to interpret it no longer applies.

How Semavor assigns the daily regime

Every daily report opens with a label: risk-on, risk-off or neutral. It does not come from an impression but from the combined balance of the signals the engine fires that session: statistically anomalous moves, VIX level and jump, volatility term structure, curve inversion, credit spread widening, dollar trend and market breadth.

Most sessions are neutral, and that is information: it means no signal strayed far enough from its usual range to tip the balance. A regime is neither a recommendation nor a forecast, but a description of what the data did in the session that just closed.