* The GRDI has just broken through 2SD for the first time in over a year which, over the last 5Y, has suggested down
markets over the following 1M and 3M. While sentiment indicators are providing mixed messages at present, one that is very elevated is our FX strategists’ Global Risk Demand Index, which moved above 2 standard deviations for the first time in over a year. As the chart below illustrates, over the last five years, the GRDI rising above +2SD has typically signalled down markets over the following 1M and 3M. When the GRDI has been above 2 standard deviations in the last five years, European equities have on average fallen 0.5% over both the following 1M and the following 3M.
* The divergence between the GRDI and the USD in the last month has been surprising. For much of the last few years, it has seemed that FX markets have had an unprecedented influence on risk appetite. As illustrated below there has been a tight correlation between the GRDI and the trade-weighted USD in recent years. While stronger US macro data in recent weeks may help explain the divergence, one of the most surprising elements of the risk rally in recent weeks has been the fact that it has occurred despite the USD strengthening by over 2% in the last month.