Bloomberg News

Financial-Stress Index Sends ‘Risk-Off’ Signal: Chart of the Day

April 13, 2012

Concern about the global financial system’s stability has grown so much during the past two weeks that investors ought to take less risk, according to Bank of America Corp.’s Merrill Lynch unit.

The CHART OF THE DAY displays the firm’s Global Financial Stress Index, derived from indicators of volatility, solvency, ease of trading, demand for hedges and money flows. The chart also shows the MSCI All-Country World Index, a gauge of share prices in developed and emerging markets, for comparison.

Forty market-related gauges go into the Bank of America indicator, and 10 of them surged far enough to send a so-called critical stress signal three days ago. The “risk-off” warning was the first since July 12, just before a second-half retreat in stocks got under way.

“We recommend caution,” Benjamin Bowler, head of global derivatives research, and two colleagues wrote in a report two days ago. The MSCI All-Country World declined by an average of 3.8 percent in periods when the signal was in place since 2000, the report said.

The stress index’s components reflects the potential worsening of a euro-region debt crisis, according to Bowler, based in San Francisco, and Anders Armelius and Abhinandan Deb, his London-based colleagues.

Credit-default swap rates for government borrowers are showing the most stress, according to their data. A CDS-based based indicator was at 4.1 three days ago. Readings above zero show stress is higher than normal.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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