The past few weeks have been replete with drama – oil price surges, repo market disruptions, and even US Presidential impeachment inquiries. Stock markets have stumbled but a more objective measure of market risk, the Macro Hive Risk Barometer, suggests we are far from ‘risk aversion’. Certainly, risk has increased, but we are not in the same territory as early August, when our measure was clearly in ‘risk aversion’ territory (Chart 1)…
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The past few weeks have been replete with drama – oil price surges, repo market disruptions, and even US Presidential impeachment inquiries. Stock markets have stumbled but a more objective measure of market risk, the Macro Hive Risk Barometer, suggests we are far from ‘risk aversion’. Certainly, risk has increased, but we are not in the same territory as early August, when our measure was clearly in ‘risk aversion’ territory (Chart 1).
Our Risk Barometer comprises market measures of risk in equity, FX, EM, and credit markets. In each case, we use either volatility or spread measures like VIX or CDX. Breaking out our index, we find that EM markets are in ‘risk aversion’, while equities and FX are in ‘neutral’ territory. Credit, on the other hand, is ‘risk seeking’ (Chart 2). This disagreement between the components suggests that there are independent factors driving markets, rather than an over-arching risk aversion story.
However, things could change. We have seen both equity and FX risk pick up over the past week. That leaves credit as the critical market to monitor. If it starts to deteriorate, then we could see a more concerted move into broader ‘risk aversion’. Should that happen, we would have a clearer signal to reduce exposure to equities and risk markets in general.
Chart 1: Macro Hive Risk Barometer
Chart 2: Macro Hive Risk Barometer: Components
Bilal Hafeez is the Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research. He can be contacted here.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs)