This is probably not going to bowl you over, but financial stress is on the rise again.
Bank of America Merrill Lynch’s global financial stress index, the memorably named GFSI, rose this week to its highest level since September as investors wondered just what exactly is going on in the euro zone.
The GFSI, which BofA Merrill rolled out last week in a bid to cash in on the rising financial markets fear trade, hit 0.44 Tuesday. The rise came as European bond markets rejected the Irish bailout and U.S. Traders fled the document-brandishing Wikileaks guy. The index dropped back a bit amid market rallies later in the week.
That’s not a historically high level — the index would have been at 1.2 during this spring’s Greek crisis and would have briefly cleared 3 following the collapse of Lehman Brothers had it existed at the time, BofA notes. Even so, the recent runup marks a sharp increase from the index’s near-zero state a month ago, BofA Merrill notes.
The risk subindex has tripled over three weeks, the firm says, while the skew subindex (measuring hedging activity) has risen less sharply. The flow subindex (tracking where funds are being invested) remains low, suggesting investors retain interest in riskier assets such as emerging market stocks and high-yield bonds.
But as BofA Merrill noted last week, these trends together could be pointing to a pullback in the stock market. The timing is noteworthy because a number of Wall Street firms were out this week with increased global growth forecasts that they say should support higher stock prices.
“The last time we saw positive readings for Risk and Skew but a negative reading for Flow was in Apr’10, preceding a 14% drop in the S&P,” the firm writes in its Global Strategy Weekly.