Elevated volatility leading to higher equity and debt risk

State Street’s systemic risk index is approaching its highest levels on record, making it too soon to feel comfortable with going back into the market.

The index, which had run since 1996, measured the degree to which a small number of macro risk factors, as opposed to stock-specific news, could drive stock returns.

Tim Graf, head of global macro strategy EMEA, at State Street Global Markets, said: “Although policymakers have made tremendous strides in addressing the ongoing collapse in demand and disruption to financial conditions, markets remain uniquely fragile and susceptible to higher drawdowns than normal.

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“Though markets should be comforted by the extent of the policy response, and by the fact that many measures of market stress are starting to normalise, it is still too soon to feel comfortable with the investing environment.”

Regarding fixed income, debt market indicators remained in ‘crisis mode’ due to the elevated levels of implied volatility across all markets.

Frederic Dodard, head of portfolio management EMEA, for State Street Global Advisors, said: “At this stage of such a profound and long-lasting crisis, spreads on risky debt are among the financial variables that are particular relevant to monitor given the information they give on credit and funding market conditions. They have started to modestly decline from the stressed level seen in March, but it is a long way before they reach a normalized level.

“For example, spreads on global high yield were close to 1200 basis points on 23 March and are now still above 1000 basis points – a level in the 400-500 basis points range is considered normal. With the extraordinarily elevated levels of implied volatility across all markets, this continues to position our Market Regime Indicator in a crisis mode.”




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