Financial stress in US, advanced economies, and EM have normalized

 

Financial stress during the COVID crisis has been a developed world problem. In general, financial stress shocked markets in March and then saw a strong policy response which pulled stress back down to normal. Markets responded as expected to this change in stress. Down on the increases and then rallying on the reduction. 

There was not the same stress variation in EM markets as measured by the Office of Financial Research (OFR) indicators. The stress indices are a weighted average of market variables that are believed to represent stress in markets. Given the greater underlying variability in some of the EM indicators employed, the index will show less variability when it is normalized. 

The longer-term stress levels are shown below. The spike in stress was strong, but short in duration. This crisis certainty was not the same as stress dislocations during the GFC. Central banks and governments reacted faster and with more force than in 2008. 

By any measure, EM did not behave like the shock in 2008. EM equity returns have not been immune to DM stress, but the link seen during the GFC was more acute and the DM - EM equity and bond links are representing new history and not the same old spill-over to weaker economies. This stress delinking offers return and diversification opportunities.