Research shows that markets are recovering their mojo

Research published by S&P Capital IQ, the financial data and analytics provider, gives a perceptive insight into how far financial markets have moved on from the uncertainty and fear that have overshadowed them over the last five years.

Credit History

Data from the global sovereign credit default swaps market in Q1 2014, which is a barometer of how likely the market thinks governments are to default on the bonds they issue, shows that investors’ aversion to risk is on a downward trend. Even the Crimea crisis appeared to have little impact. 

While Russia did see its ‘credit spread’ widen by the biggest margin globally because of Crimea, rising 30% over the quarter, it was still some way below the record level it saw in October 2008.

Credit spreads in the rest of Europe – both East and West – and the United States were all unaffected. Most notably, the spreads of Cyprus, Portugal, Spain and Greece – those countries seen as high risk ‘peripherals’ after the Euro crisis – reduced the most in the region, possibly signalling that their economic recovery is on the horizon, according to S&P Capital IQ.

It was against this increasingly favourable backdrop that Greece recently issued more than $4bn in five-year bonds at a surprisingly low interest rate of less than 5%, just two years after it forced previous buyers of its bonds to accept they would be getting a lot less of their money back than originally planned. Record low levels of interest are also being seen on the bonds of the Italian government, which was not so long ago seen as a pariah by the market.

Generally, financial markets now seem relatively optimistic about geopolitical risk and the muted reaction of markets to Crimea and other crises involving Iran, Iraq, North Korea and China/Japan seemingly illustrates this. Any fears about these potential flashpoints have been significantly outweighed by the confidence generated by the stronger-than-expected recoveries being seen in the US, European and Japanese economies.

It remains to be seen whether markets are right to disregard the geopolitical risk. The ongoing crisis in Ukraine is still deeply unsettling and a swift resolution would be welcome, if perhaps unlikely.  But the positive underlying trend in market confidence is tangible and bullishness is overtaking fear once again as the dominant emotion among investors. This bodes well for investors in equities.

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