20180522-NATIXIS-The_multiple_reasons_why_risk_aversion_has_risen_since_the_start_of_2018_7页_773kb

Flash Economics Summary: Rise in Risk Aversion Since 2018

Core Content

This document discusses the significant rise in risk aversion since the start of 2018, analyzing multiple factors that have contributed to this trend. It also provides insights into the implications of this risk aversion on financial markets, and concludes that it is likely to remain high in the foreseeable future.

Main Causes of Increased Risk Aversion

1. Protectionism Risk

   • The introduction of customs tariffs in the United States has raised concerns about trade tensions.
   • This has contributed to the upswing in growth in OECD countries, driven by global trade growth.

2. Geopolitical Tensions and Sanctions

   • Tensions in the Middle East, particularly between Iran and Saudi Arabia, have impacted oil prices.
   • Sanctions against Iran and Russia may hinder oil production recovery in Iran and affect Russia's economic growth due to rouble depreciation.

3. Uncertainty About Growth in the US and Eurozone

   • Leading growth indicators are beginning to decline.
   • The unemployment rate is approaching the structural level, which may signal a slowdown in economic activity.

4. Uncertainty About Federal Reserve Policy

   • Financial markets anticipate five additional 25 basis point hikes in the Fed Funds rate.
   • There is uncertainty about whether the Fed will act more aggressively in response to full employment and inflation returning to 2%.

5. Uncertainty About Oil Prices

   • While a sharp rise in oil prices is not currently expected, geopolitical tensions and rising global demand could lead to such an increase.

6. Uncertainty About Emerging Markets

   • Emerging countries (excluding China) have seen some improvement due to renewed capital inflows.
   • This has led to exchange-rate appreciation and lower inflation and interest rates.
   • However, increased risk aversion and higher dollar interest rates could reverse these trends, causing capital outflows, exchange-rate depreciation, and rising inflation and interest rates in emerging markets.

Impact on Financial Markets

• The rise in risk aversion has been reflected in the Natixis risk perception index (Charts 1A and 1B), showing a sharp increase.
• Credit spreads have widened (Charts 2A and 2B), indicating higher risk premiums for lending.
• Equity risk premia have also increased (Chart 3), reflecting higher required returns for equities due to heightened uncertainty.

Conclusion

The multiple and reasonable causes of the rise in risk aversion—such as protectionism, geopolitical tensions, sanctions, economic growth uncertainty, monetary policy ambiguity, and oil price volatility—are unlikely to disappear quickly. Therefore, it is reasonable to maintain a high level of risk aversion when forecasting interest rates, credit spreads, and risk premia.

Key Information

• Risk Aversion Indicator: Natixis risk perception index (in basis points)

• Financial Market Impacts:

  • Widening credit spreads
  • Rising equity risk premia

• Geopolitical Factors: Middle East tensions, sanctions against Iran and Russia

• Economic Uncertainties: US and Eurozone growth, Fed policy, oil price dynamics

• Emerging Markets: Vulnerable to capital outflows and exchange-rate depreciation

• Disclaimer:

  • Intended for professionals and qualified investors
  • Strictly confidential
  • Not a personalized investment recommendation
  • Based on public information and not verified by Natixis
  • No liability for differences in valuations or assumptions

• Regulatory Information:

  • Supervised by the European Central Bank (ECB)
  • Authorized and regulated in various jurisdictions including France, the UK, Germany, Spain, Italy, and Dubai
  • Recipients must comply with local legal restrictions

This document is a general market analysis and does not constitute financial advice.