Chart of the Week : ECB Systemic Risk Indicator
Head of Macro Analysis
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
Q4 Outlook 2022: Winter is coming
- Winter is coming to the financial markets as central banks are tightening their grip. How spring will look is still a question.
European energy crisis: it will get worse before it gets betterThe winter in Europe will be tough, but whether the result is political chaos or sustainable, innovative solutions is still undecided.
A difficult and volatile quarter awaitsAs the year draws to an end, commodities continue to be at centre stage of the world with growth pockets political uncertainty.
The bright side: crises drive innovationThe positive spin on crises is that they come with solutions. It is worrisome that deglobalisation may be a response to this crisis.
Green transformation in China: renewable energy and beyondGoing green, China needs to span numerous energy sources to ensure stability, as every source comes with a challenge.
Asia: Intermittent solutions, but a faster renewable adoption curveAsian energy supply is being squeezed. This and the adoption of renewables may change the investment sentiment in the region.
FX: A Fed thaw needed to deliver a sustained USD turn lowerThe US Dollar can keep momentum when the Federal Reserve continues to tighten, leaving the rest to play to their drum.
Autumn can become ugly for equities and bond holders. Comfort for Dollar longsTechnical analysis suggests that equities could face a tough Q4 as could fixed income. US Dollar positions could provide some upside.
The next stock market sector to watch, with stocks going nuclearAs the world scrambles to find affordable, sustainable energy, nuclear is getting attention from politicians and investors alike.
The crypto space is getting cold when the hype disappearsCryptocurrencies face a winter of their own as retail investors and governments are asking tough questions.