Credit Suisse: “Our Risk Appetite Index Is Near Panic”

… but it’s hardly been apocalyptic: in fact, most of the shocks that took place were well telegraphed to those who paid attention. And yet, according to Credit Suisse, after the first six months of the year investors are in a state of near shock.

Next Month, Another Mishap

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What is causing paralysis? According to the second largest Swiss bank, the investor “panic” can be attributed to:

Trade disputes, the Italian budget, Fed tightening, and emerging market turbulence are contending to be the main driver of this risk appetite slump. However, growth concerns have featured too, as European data in particular have disappointed. Meanwhile, many investors claim that widening credit spreads and a flattening yield curve portend the cycle’s end.

To Sweeney, who focuses mostly on economic developments, “there is a significant chance that our global risk appetite index falls below -3 in the coming months, which we define as “panic”.

Panics have historically coincided with periods of weak IP momentum. Since 1990, there are only two examples of global IP momentum growing faster than its current rate when risk appetite entered panic: July 2002 and August 2011. In 2002, IP momentum weakened almost immediately. In 2011, an IP slump did not occur until 12  months later, when risk appetite had recovered.”

Credit Suisse Measures, 2005 - 2018

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And yet, one specific region poses significant risk to the future global economy: Europe. According to Sweeney, “at the end of last year European business surveys hit multidecade highs and IP momentum reached 7%. Such growth was unsustainable but the abruptness of the slowdown has been extreme.”

Global Risk vs Global IP Momentum, 1990 - 2018

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Sweeney’s take: “for global growth to stay strong in the second half of 2018, European growth must improve.”

Which in a time of escalating protectionism and trade war for the export heavy continent, could be a major problem. However, there is a silver lining: if and when investors panic, and the projected IP rebound fails to materialize, central banks will have no choice but to respond, effectively voiding any ECB plans to not only end QE but to hike rates, whether in the summer of 2019 or the last months of the year.

In short: global investors panicking is the best possible thing that could happen to, well, global investors as it means another bailout from central banks.

Unless of course, central banks refuse to get involved this time, and leave markets to their own devices. Which could be a problem: with 40% of today’s traders never living through a real market crisis where central banks did not step in, the next time price discovery takes place without a central bank backstop, investors may just learn what panic really means.

Europe Global IP momentum, Jan 2015 - Jul 2018

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