Saxo’s Chart Of The Week: ECB Systemic Risk Indicator

Free Speech Website Management

Saxo’s Chart Of The Week: ECB Systemic Risk Indicator

By Christopher Dembik, head of macro analysis at Saxo Bank

This is certainly the most important chart ahead of Thursday’s ECB meeting.

Initially developed by Hollo, Kremer and Lo Duca in 2012 in the midst of the euro area sovereign debt crisis, the ECB systemic risk indicator is based on fifteen financial stress measures and is used to track emerging market stress that could force the ECB to step in in the market. It is not a leading indicator, but it is very useful to assess the evolution of monetary policy in the euro area and judge the market impact of the latest policy moves.

What is particularly striking is that market stress is almost back to pre-crisis level following the latest ECB measures announced in December (increase in the PEPP envelope and extension by another nine months until at least the end of March 2022). After spiking to an annual peak at 0.34 in mid-March (which is still below levels reached in 2012), it has moved downward and is now almost back to where it was before the outbreak , around 0.07. In our view, this indicator perfectly summarizes how successful was the ECB to contain financial risk in 2020 and is a clear signal that no further monetary action is needed in the short term.

The muted market reaction to rising political risk in the euro area (with political crises in Italy and the Netherlands) constitutes further proof of the ECB’s success. Basically, this week’s meeting will mostly consist in another communication test for the ECB president Lagarde with two main points of interest: the evolution of the euro nominal effective exchange rate, which is getting growing attention by the Governing Council as revealed by the minutes of the December meeting, and the evolution of inflation that could temporarily move upwards due to higher commodity prices, base-effect in Q2 and supply-side bottlenecks that are particularly significant in Europe.

A strong euro (which mostly results from lower US dollar) and inflationary pressures should be regarded as transitionary by the ECB, therefore not resulting in further policy action.

Tyler Durden
Tue, 01/19/2021 – 03:30


This post has been republished with permission from a publicly-available RSS feed found on Zero Hedge. The views expressed by the original author(s) do not necessarily reflect the opinions or views of The Libertarian Hub, its owners or administrators. Any images included in the original article belong to and are the sole responsibility of the original author/website. The Libertarian Hub makes no claims of ownership of any imported photos/images and shall not be held liable for any unintended copyright infringement. Submit a DCMA takedown request.

-> Click Here to Read the Original Article <-

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

DonatePlease support this website!

This website is a passion-project to educate readers about current events through the lens of libertarianism.

We need your help to keep this website online and offset the costs of hosting and weekly newsletter distribution.

Please consider donating today to keep this website running for everyone to enjoy!

Weekly Newsletter SignupTop Story of the Week

Subscribe to our newsletter to receive a weekly email report of the most popular article on the Libertarian Hub!