Global | Asset price dynamics and global macro-financial conditions index

Summary

We identify the main drivers of key financial market asset price dynamics, including the Euro-dollar exchange rate and the Bund-US Treasury yield spread, using a sign-restricted SVAR model. The model also facilitates the extraction of a high frequency global macro-financial conditions indicator.

Key points

• Key points:
• The shocks derived from the model are individually useful to gauge past as well as current policy, macro and risk environment and relative shifts in terms of trade. As such, these shocks capture well different aspects of the last 15 years’ crisis episodes, including the Global Financial Crisis, the Eurozone debt crisis, the Taper Tantrum episode, the pandemic, the Ukraine War as well as the tariff led uncertainty over the past six months.
• Our results suggest that one of the key drivers of the recent appreciation in the euro-dollar is the increased uncertainty over the impact of President Trump’s tariff policies on the US economy and the prospects of the US dollar. In favor of the Euro is the announcement of Germany’s massive fiscal spending package, which is supportive of the Eurozone macro outlook and also puts upward pressure on Eurozone yields given the fiscal risk premium.
• The widening of Bund-UST yield spreads over the past half a year is seen to be driven mainly by the boost to Eurozone Macro factor caused primarily by the German fiscal spending announcement. Meanwhile, the weaker US macro factor owing to tariff uncertainty is seen to weigh on US yields. Interestingly, the safe haven appeal of US treasuries is seen to have taken a beating in the recent risk-aversion episode unlike during past crisis events such as the global financial crisis of 2008 (GFC).
• The recent evolution of our global macro-financial conditions index suggests an improvement in risk appetite since the peak of tensions towards the end of March. In early April, while the global risk component of the index jumped due to Trump’s tariff threats and the US monetary policy remained relatively restrictive, its rise was partly offset by a visible improvement in terms of trade.

Geographies

Topics

Tags