Last week’s top surprise was the global banks rally, apparently driven by improved Chinese trade data on April 13, highlighting the continued importance of China to global markets. This synchronized global bank rally comes at a cost, however: 70% systematic risk (i.e., volatility driven by a common market factor), which exceeds last year’s Aug Flash Crash levels. Fig. 1 shows systematic risk reaching a new 100 day high on April 13, with green highlighted banks representing positive daily outlier returns (95% Confidence Level).
Fig. 1 GSIB FNA Correlations map highlighting 95% confidence level VaR outliers on April 13
Fig 2. below shows the Cross Asset FNA Correlations on April 13, ranking China large cap equities $FXI as top positive outlier, followed by Financials $XLF. CHF and EUR surprised to the downside vs. USD (red highlight) in a broad risk market rally.
Fig. 2 Cross asset FNA Correlations ranking of outliers on April 13
China’s improved trade data was clearly a big relief to banks and markets globally, but elevated systematic risk suggest caution. High systemic coupling implies that any surprises — such as a renewed oil plunge or a downside Chinese surprise– could result in a synchronized plunge.
The short video below briefly reviews the key dynamics driving the global bank rebound, with a special focus on the increased correlation between Chinese and global banks.
Video 1: Analyzing the Global Bank Bounce of April 13 (2.53 min)