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 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.