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.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
