Chart of the Week : ECB Systemic Risk Indicator
Head of Macroeconomic Research
Summary: In today’s ‘Macro Chartmania’, we focus on the ECB Systemic Risk Indicator. All the data are collected from Macrobond and updated each week.
Click to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments: MacroChartmania_master1402.
Risks are tilted to the upside in the eurozone : risk of technical recession in France, risk of stagflation in Germany, persistent supply chain disruptions (due to the zero Covid policy in China and the Ukraine war), commodity supercycle (with higher food and energy prices hitting hard the 15-20% lowest income quintile), low real effective exchange rate leading to higher imported inflation (based on our calculations the EUR is 27 % too low compared to the USD, for instance) and weak European leadership, amongst other things. The situation is unlikely to improve, in the short-term. We see higher risks of financial stress in the eurozone too. We measure the evolution of financial risk using the ECB Systemic Risk Indicator (created in 2012 by Hollo, Kremer and Lo Duca) – see below chart. This is based on fifteen financial stress measures (such as exchange rates and spreads etc.). It now stands at 0.26 and keeps climbing. It is still below the peaks reached in March 2020 at 0.35 (global lockdown) and in February 2022 at 0.34 (invasion of Ukraine by Russia). But we believe it is likely to reach the pain zone of 0.34-0.35 in the coming months and weeks.
Foreign investors are getting increasingly worried about the risk of bond market fragmentation in the eurozone. Some countries are in a better position than others. Liquidity in the Italian sovereign bond market has been deteriorating sharply this year. Basically, foreigners just want to get out. This is not the same situation in Spain, for instance. The country is still getting foreign inflows. Wider spreads are putting Italy at risk. We fear the country will become Europe’s black sheep once again – thus putting eurozone policymakers to the test. The Italian long-term bond yields are now 2 percentage points higher than for Germany (which serves as the market benchmark). It will probably get worse when the ECB ends Quantitative Easing and starts hiking interest rates, perhaps as early as at the July meeting. There will be no roaring twenties for the eurozone.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.