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Tightening financial conditions sound alarm for world economy -Breaking


© Reuters. An overview of Moscow International Business Center also known by “Moskva-City”, Moscow, Russia. January 17, 2018. REUTERS/Maxim Shemetov


By Yoruk Bahceli

(Reuters.) – The tightest global financial conditions in the past two years is due to soaring oil prices, falling stocks, market declines, and the impact of the Ukraine-Russia conflict.

Financial conditions describes how economic metrics, such as equity swings, borrowing costs and exchange rates affect funding availability.

What kind of conditions exist will determine how households and businesses spend, save and invest.

Goldman Sachs (NYSE :), which compiles some of the most popular financial conditions indexes has shown a 100-basis point tightening crimps economic growth by one percentage points in the coming years with an equal loosening providing a corresponding lift.

For a global economy that has been already under threat from the drop in oil prices to $120-a barrel and setbacks to its supply chains due Russia’s sanctions, tightening will be a negative development.

(Graphic: GS global financial conditions,

These will drive inflation higher and, “if central banks take the mandates seriously you’ll see further tightening in financial conditions,” Rene Albrecht of DZ Bank strategist said.

“Economic dynamics may slow down further. Inflation will still be high. You will then see second round effects. Then you get a situation of stagflation,” he said. This refers to both rising inflation and slower economic development.

Goldman Sachs’ global Financial Conditions Index (FCI), at 100.2, is 60% tighter that before Russia’s invasion in Ukraine. This level was not seen since March 2020, the first time the pandemic struck.

Its Russian FCI led the rise, rising as high as 114.8, from around 98 at February’s start to become the tightest since 2008, driven by an increase in interest rates and market collapse.

An emerging market FCI has been made more restrictive by the Russian action than it was in 2016.

(Graphic: GS Russia financial conditions,

The Eurozone moves are also significant. These conditions, which are heavily dependent on Russian oil, have reached their highest point since November 2020. The Euro zone moved 50 bps in Feb. It was also influenced by the European Central Bank’s (ECB), opening the doors to interest rate rises for this year.

Viraj Patel (NASDAQ:) Research’s global macro strategist, stated that financial conditions will be of greater importance to the ECB which meets Thursday.

He said that if the government proceeds with rate rises and the dewinding of bonds purchases as was expected, the financial situation could be tightened to the levels of the pandemic, or the sovereign debt crisis of the bloc a decade ago.

Conditions in the United States have been less tightening.

However, the indicators Goldman uses for its indexes are not helpful; safe-haven flows have boosted the U.S. Dollar, which has been near two-year highs. World stocks fell 11% in this year’s first quarter, mainly due to a close-20% drop in eurozone equities.

As investors evaluate the impact on companies’ profits, U.S. corporate bond risk premia for investment have increased by 40 bps in U.S.

The policymakers are not likely to be overly concerned by historically liberal conditions in the developed markets. Inflation-adjusted, borrowing costs are down sharply and hit a record low of -2.5% Monday in Germany.

Mizuho’s head of Multi-asset Strategy, Peter Chatwell said this gives central banks more room to talk hawkishly.

(Graphic: GS euro area financial conditions,