Chart of the Week : ECB Systemic Risk Index Chart of the Week : ECB Systemic Risk Index Chart of the Week : ECB Systemic Risk Index

Chart of the Week : ECB Systemic Risk Index

Macro
CD
Christopher Dembik

Head of Macro Analysis

Summary:  In today’s ‘Macro Chartmania’, we talk about fragmentation risk in the eurozone. We use the ECB Systemic Risk Index to track market stress. It was initially developed by Hollo, Kremer and Lo Duca in 2012, in the midst of the eurozone sovereign debt crisis. Market stress remains at an elevated level. But it is now decreasing which seems to indicate that central banks are getting control back of the bond market (where tension was the highest in recent weeks).


Click here to download this week's full edition of Macro Chartmania composed of more than 100 charts to track the latest macroeconomic and market developments.

The ECB Systemic Risk Index is based on fifteen financial stress measures such as exchange rates or spreads. Before Covid, we used to identify the level between 0.25 and 0.30 as the danger area for the eurozone which could force the ECB to adopt a more dovish stance or to step in in the market (verbal communication or bond purchasing). Things have changed. The indicator reached a peak at 0.50 in early October without any intervention from the central bank. The last time such a level was reached was in 2011 when investors were wondering if the eurozone would implode. This was before Draghi’s whatever it takes. However, there is good news : the indicator is receding a bit. It now stands at 0.40. This is still comparatively high. But it seems to indicate that bond market dysfunction (which partially resulted from contagion from the UK bond market meltdown following the release of the costly ‘mini-budget’) is disappearing. Looking at the situation this week, it seems that central banks are back in control, for the moment. It is uncertain how long it might last. In the short-term, this means that the ECB has a large room for maneuver to increase interest rates next week. Our baseline is that the Governing Council will need to send a new hawkish message (meaning 50 basis point interest hikes) as inflation continues to increase (it is running at 10 % year-over-year in September in the eurozone) and it is still widespread (going from the manufacturing sector to the services sectors). We think the ECB can accept a higher risk of financial fragmentation in the eurozone in the short-term in order to fight inflation in the long-term, at least until the recession will be officialized, likely in the first quarter of 2023. This means that the ECB has until February 2023 to bring back real interest rates high enough for inflation to finally recede. In the world of central bankers, this is a rather short window of opportunity to act.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.