The RSM US Financial Conditions Index reached neutral at the end of last week and turned negative on Tuesday’s news that Russia would formalize its control of Russian-speaking parts of Ukraine.
Risks to the world order, the balance of power in Europe and fears of another series of supply shocks that will affect everything from energy to the production of microchips are at the core of the index’s decline.
The combination of geopolitical concern, policy normalization by central banks around the world, and the eventual response to address inflation were enough to pull the rug out from under U.S. financial market accommodation.
To a degree, each of the equity, bond and money markets has since the middle of January begun to price in more risk to holding financial assets.
There is the eventual withdrawal of monetary policy support as the economic recovery takes hold, which was complicated by an anticipated monetary-policy response to the rapid increase in consumer prices.
It was the equity market that fell the hardest.
The bond market is nearing a neutral level of risk after a long period of intervention by the Federal Reserve. The money market remains accommodative, which is an important factor for day-to-day commercial activity.
Financial accommodation is necessary for sustaining an economic recovery, providing stability and creating conditions for profit necessary in the investment decision-making process.
Whether this recent episode of negative financial conditions is as short-lived as the three episodes during the U.S. trade war, the cumulative effects of the loss of confidence will most likely last longer, threatening commercial activity among developed economies.