This week’s Market Risk AlertTM rating remains at 2, (1 to 5 ranking, 5 being max risk-off) as the ONLY negative signals are all realized measures such as higher volatilities and lower returns. Last week’s losses were not limited to equities in over 1 year as most risk assets waned with meaningful 2D losses. However, we do not see the action in volumes, correlations and other metrics usually present just prior to a major sell-off such as the EM inspired losses this past January. The spread widening in both corporate and bank credit has our attention given the increased and untested leverage in the system over the past 18 months. As discussed in our 2014 outlook, the sustained and global reliance on ZiRP will continue to drive risk and opportunity for investors in 2014 and beyond.
Regional Market Risk Heat Map (below)
The chart on the following page illustrates the lack of signal strength (green/yellow) for a risk reversal across most regions despite the relatively significant sell-off in Global Equities. This week did see more follow through from other markets across regions with Japan being the most susceptible to loss based on Yen strength and high cross-market correlations. We discount the US’s high reading given the favorable trend in x-market readings towards the week’s end.
Outlook: Developments in the Ukraine have the ability to move risk markets lower – likely limited to the 2-3% range for equities and to +/- 1% for high yield. This potential for continued volatility in global equity markets will be realized the most in the NIKKEI which will likely continue to underperform the G-10 indices according to our signals.