Thu, December 08, 2022

What Explains the Calm in Global Financial Markets?

What Explains The Calm In Global Financial Markets?

The financial assault waged by the West against Russia has been spectacular. Commodity markets are a mess; they are fanning already uncomfortably high inflation; hence, predictions for global economic growth have been lowered as a result. Many enterprises will suffer significant losses due to their exodus from Russia.

However, many investors and experts have been taken aback by the relatively little impact on the global financial system and the lack of larger, more significant ramifications thus far. The MSCI All-Country World Indicator has risen beyond its prewar level. In contrast, the Vix volatility index — a proxy for market worry — has dipped below its long-term average, signaling a decrease in concern.

Robert Michele, the chief investment officer of JPMorgan Asset Management, the US bank’s $3 trillion investment arm, says, “I’m amazed at how resilient markets have been.” “I’ve been doing this for over 40 years, and I can’t recall a period when a shock of this size didn’t result in systemic pressure someplace.”

More Surprises on The Way

Nonetheless, some analysts believe that the crisis might still bring some unpleasant surprises, with the financial consequences yet to be seen. Furthermore, many other factors are currently rattling the financial system: soaring inflation, rising interest rates, under pressure technology stocks, debt problems in developing countries, and the lingering coronavirus — all of which could interact in dangerous and unpredictable ways to create unanticipated problems.

“Remarkably, nothing has happened so far,” says Richard Berner, the first head of the US Treasury’s Office of Financial Research, established during the 2008 financial crisis to watch the globe for systemic threats.

Indeed, Bank of England Governor Andrew Bailey noted how the combination of commodities and financial market strains might produce issues in a speech this week.

Complex adaptive systems are notoriously difficult to comprehend. They may be remarkably durable and cataclysmically frail, dynamically responding to setbacks but occasionally succumbing to a poisonous mix of seemingly modest independent failures.

Overgrown trees hitting electricity wires in Ohio caused the massive 2003 North American energy outage, exacerbated by a software glitch and human error.

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