Investor risk appetite indices (MSCI, VIX, Euribor-OIS)
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Few would deny now that the most important factor influencing the spillover of capital between different segments of the financial market is investor appetite for risk. During a downturn or recession of the world economy it escalates, during a recovery or growth it hides in the deep corners of consciousness.
MSCI World Stock Market Index
When investors feel optimistic about the future prospects of the global economy, they begin to actively purchase risky assets: stocks, commodities or currencies characterized by higher rates of the central banks of the issuing countries. Quotations of these financial instruments grow as a result of increased demand. There is a close correlation between the world stock and currency markets, which can be traced on the example of comparing the dynamics of MSCI Index and quotations of the main currency pair eur/usd.
MSCI Index and EURUSD exchange rate
As can be seen from the graphs, there is a strong correlation between them: the fall of the euro, which began in late August last year, was quite accurately predicted by the dynamics of MSCI Indexwhich began to decline back at the beginning of the last month of summer. The growth of the single European currency since January this year could be predicted on the basis of the December increase in quotations on world stock markets.
MSCI Index is a global stock exchange index reflecting trends in capital flows on global stock markets. It has been calculated by Morgan Stanley since 1969 and includes shares of the world's leading issuers. The main calculation criteria are company capitalization, the proportion of free-float shares and liquidity, determined on the basis of the ratio of average monthly turnover to free-float.
The growth of the index indicates an increase in demand and shows an increase in the "appetite for risk. In this case, Forex investors are advised to pay attention to currencies characterized by higher interest rates of central banks.
Chicago Board Options Exchange VIX Index
The MSCI is not the only indicator that helps determine investors' risk appetite. The U.S. stock market uses Chicago Board Options Exchange VIX Indexwhich is otherwise known as the "fear indicator". It is a measure of the expectation of change in stock market volatility over the next 30 days. The current value of the indicator is in the region of 15-17%, which indicates that the S&P500 index with a probability of 68% will not change during the reporting month by a value exceeding 4.3-4.9%.
There is a common saying among market participants: "When the VIX is up, you should buy. When the VIX is down, you have to sell. Consequently, this index can also be used as a kind of "risk appetite" indicator.
VIX Index
S&P500 Index
As can be seen from the charts, low values of VIX in June-July last year allowed conducting effective short deals, and, on the contrary, high values of the index in August-October created preconditions for development of a bullish trend. At present, the index is tending to the lows again, which signals a potential reversal of the uptrend. Consequently, risk appetite is shrinking.
Other indices that measure risk appetite
However, the stock market is far from being the only sphere of excess liquidity application. Investors' appetite for risk can be estimated based on American and European yields. bonds.
U.S. Treasury Bonds attract the attention of investors during a recession or downturn in the global economy. Currently, the yield on them is 1.85-1.95%, which indicates a moderate demand. The high yield of about 2.4% was recorded in mid-March this year, when the euro against the U.S. dollar tried to form a new high. The dynamics of the differential between US and German bonds also looks interesting, but we will talk about that in the next materials.
Against the backdrop of a recession in the European economy, investors began to pay attention to Euribor-OIS indexreflecting the spread between the 3-month interbank rate (Euribor) and Overnight Index Swaps. This indicator is otherwise known as "an indicator of reluctance of European banks to lend to each other," associated with increasing credit risks. Its growth during the second half of last year corresponded to the weakening of the euro. At present, the index has returned to the values of August 2011 under the influence of excess resources provided by the European Central Bank during the LTRO.
Thus, there are quite a large number of indicators that allow us to assess the risk appetite of investors. Their analysis will make it possible to identify general patterns of capital movement between different segments of the financial market and make the right decisions regarding long-term investments. I would be curious to know which of the described indices has aroused the greatest interest among the readers? Should you use just one index when making an investment decision or should you analyze a combination of them?