Synopsis:

Credit Agricole's Risk Index rose to 0.37 from 0.06 last week, reflecting heightened geopolitical concerns and cautious investor sentiment. Rising equity volatility, widening sovereign-EM spreads, and geopolitical risks are driving the shift, with currencies like GBP, NOK, and CAD showing distinct correlations to risk trends.

Key Points:

• Risk Index Overview:

  • The Risk Index climbed to 0.37, decisively below its 100-day moving average, signaling a prolonged reduction in risk appetite.
  • This marks a shift toward modest investor caution, contrasting with the index's lowest level since mid-July last week.

• Geopolitical Impact:

  • Renewed attention to the Russia-Ukraine war is weighing on sentiment.
  • US approval for Ukraine to use ballistic missiles against Russian territory has escalated tensions, with Russia threatening a nuclear response to such strikes.

• Index Contributors:

  • The rise in the Risk Index was primarily driven by increases in equity market volatility, sovereign-EM spreads, and the relative outperformance of cyclical stocks over defensive stocks.
  • FX volatility was the only component that fell over the past week.

• Currency Correlations:

  • The GBP shows the strongest positive correlation with the Risk Index, benefiting from increased risk appetite.
  • The NOK and CAD exhibit the largest negative correlations, often underperforming in risk-off environments.

Conclusion:

The rise in Credit Agricole's Risk Index reflects renewed geopolitical tensions and modest investor caution. These dynamics have important implications for FX markets, with GBP positively aligned with rising risk, while NOK and CAD remain vulnerable to risk-off sentiment.