The Foreign Exchange Matrix. Barbara Rockefeller

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СКАЧАТЬ Index (equities).

      The STLFSI peaked at 5.572 in the week ending 17 October 2008, a month after the Lehman bankruptcy, and closed the year at 4.596, which was still an elevated level when compared to the 0.676 reading seen the week of 4 January 2008. The index proceeded to edge lower into the first quarter of 2009, despite the near panicked deleveraging going on that sent the S&P 500 to a twelve-and-a-half year low of 667. By September 2009, the STLFSI was back under 1.0 and the index ended the year at 0.254, even with the admission by Greece that its books had been cooked. In 2010 and into early 2011, the index traded in negative territory at times and at worst edged up but never managed to break over 1.0. Even as euro zone peripheral tensions and US fiscal concerns increased in the summer of 2011, the STLFSI saw only the smallest of moves higher, topping out just over 1.0 on two occasions only in the weeks of 30 September and 7 October 2011. The STLFSI subsequently has remained below 1.0.

      Cleveland Federal Reserve Financial Stress Index (CFSI)

      In March 2012, the Cleveland Federal Reserve announced the creation of its own monthly financial stress index, which looks at 11 variables that are slightly different to those measured by the other Fed indexes. The CFSI is constructed using daily data from components that reflect credit, equity, foreign exchange and interbank markets. The Cleveland Fed offers four grades of stress:

       Grade 1: below normal stress with the index in a range of less than or equal to -0.50

       Grade 2: normal stress with the index in a range of -0.50 to 0.59

       Grade 3: moderate stress with the index in a range of between 0.59; and 1.68

       Grade 4: significant stress, with the index above 1.68

      In the fall of 1998, at the peak of the Long-Term Capital Management crisis, the CFSI “neared a value of 2.0,” a level that was not seen again until the start of the subprime mortgage crisis. The Cleveland Fed noted that the CFSI “climbed into the ‘significant stress period’ grade in late 2007 and remained there throughout the middle of 2009.”

      While the CFSI has not moved back into this ‘significant stress period’, it rose throughout 2011 and remained in ‘moderate stress’ territory in early 2012 before falling into ‘normal stress’ mode later in the year.

      4. Bank stress indexes

      Various banks have developed their own versions of the Federal Reserve stress indexes, which like the Fed stress indexes are popular tools for FX traders.

      Goldman Sachs Financial Stress Index (GSFSI)

      Global banking powerhouse Goldman Sachs has had its Financial Stress Index (GSFSI) in place since the collapse of Lehman Brothers in September 2008.

      “Goldman’s FSI consists of four equally weighted variables: the spread between the London interbank offered rate (LIBOR) and the overnight index swap (that is, the spread between the bank funding rate and the market’s perception of future official rates); the spread between the United States government’s repo rate (the discounted rate at which a central bank repurchases government securities from commercial banks to manage the level of money supply) and the mortgage repo rate; the amount of commercial paper issuance; and the ratio of money market funds to the value of equity market capitalisation in the US, a measure of risk aversion,” explains Jim O’Neill, former head of global economic research at Goldman Sachs, now Chairman at Goldman Sachs Asset Management.

      BofA/Merrill Lynch Global Financial Stress Index

      In November 2010, BofA/Merrill Lynch Global launched its own Global Financial Stress Index. Their GFSI is touted as “a comprehensive, cross market gauge of risk, hedging demand and investment flows.” BofA/Merrill’s goal is to “to help investors identify market risks earlier and more accurately than commonly used risk indicators, such as the VIX index.” In the launch statement for the index in November 2010, BofA/Merrill said:

      “The GFSI composite index aggregates over 20 measures of stress across five asset classes and various geographies, measuring three separate kinds of financial market stress: risk, as indicated by cross-asset measures of volatility, solvency and liquidity; hedging demand, implied by the skew of equity and currency options; and investor appetite for risk, as measured by trading volumes as well as flows in and out of equities, high-yield bonds and money markets.”

      The statement noted that “back-testing of the GFSI since 2000 illustrates that sharp rises in the index over short periods of time would have had a high degree of accuracy in forecasting sell-offs in assets, particularly global equities, commodities and US high-yield bonds.”

      “Since the global financial crisis, risk appears to have become as important to investors as return,” said Michael Hartnett, chief Global Equity strategist at BofA Merrill Lynch Global Research. “The GFSI measures risks not normally visible in public markets by incorporating assets trading in the over-the-counter market. We believe its breadth and depth make it a better measure of financial market stress than the VIX, which is based on US options data alone.”

      Citicorp’s Macro Risk Index

      Citicorp devised a Macro Risk Index, which uses a slew of measures to estimate risk aversion, including emerging market credit spreads, US credit spreads, US swap spreads, and implied volatility in FX, equity and swap spreads. The factors are equally weighted.

      The index ranges from zero (no stress) to 1 (white hot risk aversion). Citicorp admits the level of correlation among many of these components is quite high, implying that sophisticated traders who detect mispricing could use it to jump on an opportunity. The index is relatively new (its inception was in 2009) and has yet to prove itself.

      5. Inflation breakevens and inflation swaps

      Fixed income traders, Federal Reserve Board members and a growing number of currency, commodity and equity traders watch inflation breakevens and swaps. The inflation breakeven level is the difference between the nominal yield on a given fixed income instrument and the real yield on an inflation-linked instrument of the same maturity.

      US market players refer to the breakeven spread as the difference between a Treasury instrument and a TIPS instrument with a comparable maturity. For instance, the 10-year US Treasury note might offer a 4.0% yield, whereas a Treasury Inflation Protected Securities instruments (adjusted for consumer price inflation) might only offer a yield of 3.0%. If (CPI-U) inflation is greater than 1.0%, then the TIPS would be the better deal.

      The other factor to consider is that the TIPS market is far less liquid that the larger Treasury market, which can also skew prices at times. In addition to looking at US/TIPS breakevens, traders also track breakevens in the euro zone, UK, Japan and other countries that offer an inflation-protected alternative to their benchmark bond instruments.

      Breakevens and inflation swap movements give insight not only into inflation, but also risk for other asset classes. If breakeven spreads are widening globally and market players are willing to pay more for inflation swap protection, as was the case at the start of 2011, this suggests that inflation expectations are growing and it might be wise to look at an inflation hedge. Investors might buy gold or other commodities, or look to buy commodity currencies like the Canadian and Australian dollars, for protection.

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