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United States most vulnerable to new financial crisis, Nomura warns



Wouldn’t it be great to know when financial crises are about to happen?

This is the idea behind a new warning model created by the Japanese bank Nomura, with the somewhat unfortunate name of Cassandra, given that the Trojan priestess of Greek mythology was cursed to never be believed despite her precise predictions. . Financial crises, they say, are viewed better in terms of financial cycles than economic cycles.

Financial cycles are often “associated with aggressive risk-taking and can be self-fulfilling, as rapid credit growth drives up asset prices, which increases the value of collateral and, in turn, further increases the availability of credit. . Financial cycles are driven by, but also fuel, unsustainable economic expansion, manifested in unsustainable credit booms and asset prices, ”they say.

The Singapore-based Nomura economics research team built a model around five different warning signs: private credit-to-GDP ratio, debt-service ratio, real stock prices, real estate and the real effective exchange rate. Nomura says Cassandra has correctly reported two-thirds of the last 53 crises in 40 countries since the early 1990s, and she is currently warning that six economies – the United States, Japan, Germany, Taiwan, Sweden and the Netherlands – appear vulnerable to financial crises over the next 12 quarters.

Nomura also tested the risk of interest rates and climate change – and by adding them to the model, the overall scores increased, but the number of countries at the threshold of vulnerability to the crisis actually decreased, as Sweden would give up. .

PCE price data at your fingertips

The Fed’s preferred measure of inflation, the PCE Price Index, is expected to be released at 8:30 a.m. Eastern Time, along with data on personal income and consumer spending. The University of Michigan Consumer Sentiment Index is due shortly after the opening.

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A sweet spot for credit?

Credit thrives with a prospect of slow but positive growth, say PineBridge Investments fund managers. When the new orders component of the Institute for Supply Management’s manufacturing index begins to decline but remains above the 50% mark indicating expansion, that is when credit flourishes, and they are particularly fond of emerging market credit, which has lagged behind other assets. They more generally say they are reducing risk, but point out that Europe and Japan are areas to buy stocks as vaccination rates rise.

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