The global financial markets have started the year in full-blown risk-off mode. The trigger to this acute bout of risk aversion has been a tightening of global financial conditions, with the catalyst being the U.S. The Bloomberg U.S. Financial Conditions Index, created to track the level of financial stress in U.S. money, bond and equity markets and designed to help assess the availability and cost of credit, rose to its highest level since 2012 (see chart below), indicating tightening financial conditions.
The genesis of the tighter financial conditions is the start of Federal Reserve (Fed) rate normalization. Ongoing concerns about global growth, especially China, rising geopolitical risk and a free fall in oil prices are only aggravating the situation. The global sell-off in financial markets has been most acute in equity markets, followed by G10 commodity and emerging markets (EM) currencies and high yield and emerging markets bonds (EMBI). The global equity rout is led by the Shanghai Composite Index that fell -15.0% followed by the Buenos Aires Stock Exchange, Brazilian Stock Exchange, Nasdaq, Hang Seng, Nikkei, German Stock Exchange, Euro Stoxx 50 and S&P 500, which fell -11.7%, -10.7%, -9.6%, -9.5%, -9.4%, -9.1%, -7.7% and -7.5%, respectively, since the start of the year.
In foreign exchange (FX) markets, G10 commodity and EM currencies have been the big losers with ZAR, NZD, AUD, MXN, CAD, KRW and RUB declining -5.9%, -5.4%, -4.3%, -3.7%, -3.5%, -3.3% and -3.2%, respectively. The high yield and EMBI markets experienced a sell-off, declining -2.0% and -1.3%, respectively.
Oil prices continued to spiral down, with continued U.S. inventory build nearing an eight-decade high and imminent signs that the Iranian sanctions could be lifted in the coming week, paving the way for entry of Iranian crude. This sent WTI crude and Brent oil prices plunging -6.9% and -9.4%, respectively. The early bout of risk aversion has given G10 sovereign bonds and the Japanese yen (JPY) a safe haven bid. In global fixed income, Australia, France, U.S., UK, Canada and France 10-year yields rallied 3 basis points (bps), 4bps, 9bps, 10bps and 13bps, respectively. The JPY appreciated 2.3% since the beginning of the year, while the euro (EUR) gained 0.4%.