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Markets are creaking but not (yet) breaking

So far, the sell-off across bond and equity markets this year has not triggered major signs of systemic risk. If that were to change, central banks would probably have to step in to prevent a destabilising cycle of panic selling and money market distress from taking hold, even if such as step would to some extent clash with their plans to tighten monetary policy further. This publication takes stock of the various signs of stress across the global financial system. We intend to update the analysis periodically while the current market turmoil continues. In view of the wider interest, we are making this Stress Monitor available to clients of our Global Markets, FX Markets, and Asset Allocation Services.
Jonas Goltermann Senior Markets Economist
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More from Jonas Goltermann

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The ECB, the Fed, and the euro

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The dollar rally might be due a pause

Despite a reversal today, the US dollar looks set to appreciate for the sixth week running as “risky” assets remain under pressure. The DXY index has had its largest six-week gain since mid-2016 (while the S&P 500 has had its worst such period since the onset of COVID-19 in early 2020). And, despite Wednesday’s above-expectation US CPI print pointing to strong prices pressures and continued hawkish rhetoric from Fed speakers, government bond yields dropped back sharply this week. In other words, financial markets appear increasingly driven by fear of an economic slowdown.

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We think the euro will eventually weaken further, falling to parity against the US dollar, as the euro-zone economy falters, the terms of trade shock from higher energy prices feeds through, and the global economic outlook continues to worsen. Markets Drop-In (11th May, 10:00 EDT/15:00 BST): We’re discussing our Q2 Outlook reports and what they say about the potential performance of bonds, equities and FX rates as inflation peaks in a special 20-minute briefing on Wednesday. Register now.

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