Assessing the Stress from the Russia - Ukraine Conflict 

Equity Markets

• After reaching record highs in 2021, North American financial markets have gotten off to a rocky start to the year. The S&P 500 is down 11.2% from its peak in early January, after posting a gain of 26.9% in 2021. The decline, while swift, is more muted than recent episodes of equity market declines. This includes the Global Pandemic in 2020, which saw the S&P 500 decline by 33.9% in just 33 days. As a historical comparison, during the Gulf War in 1990, the S&P 500 declined by 14.6% between July and October but regained its previous high by February of the following year. The current heightened volatility is reflected in the Volatility Index (VIX) which reached an intraday high of 37 and continues to remain well above historical norms. Moreover, our Financial Stress Index is hovering at levels last seen in April of 2020 (Chart 1). Comparatively, in Canada, the S&P TSX has lost a modest 0.1% from its peak, as it has been supported by the energy sector, which has gained 34.3% on the back of rising oil prices. 
• Across the pond, equity market volatility remains elevated with the Euro STOXX 50 Volatility Index on par with levels that were experienced during the European Sovereign Debt Crisis in 2010 and 2011. In addition to heightened financial market volatility, systemic stress indicators from the European Central Bank and the Banque de France have increased sharply since the beginning of the year, but remain below the heights experienced during the 2020 Global Pandemic and European Sovereign Debt Crisis.  The elevated levels of uncertainty are reflected in the performance of the Euro STOXX which is down 16.8% from its peak this year, after gaining 20.4% in 2021. Elsewhere in Europe, the FTSE 100 has lost 7.5% from its 2022 peak after gaining 14.3% in 2021. The most severe decline can be found in the MOEX Russia Index, which has declined by 36.2% from its 2022 high prior to trading being halted. 
• The longer the Russian conflict persists, the greater the downside for global equity indices. This can be illustrated by both the Asian Financial Crisis in 1997 and the European Sovereign Debt Crisis that began in 2010. The Asian Financial Crisis saw multiple stock indexes in Asia decline by more than 60%. The declines cascaded across Europe and into the U.S., with the Euro STOXX falling by 33.9%, while the S&P 500 lost 19.3%. A similar experience occurred during the European Sovereign Debt Crisis when the Euro STOXX fell 32.3%, followed by a 19.4% decline in the S&P 500. 

Foreign Exchange

• While equity markets have seen sharp movements to begin the year, currency markets have been more muted for most major currencies. The euro and the pound have depreciated by 3.4% and 3.3%, respectively, while commodity focused currencies such as the Canadian and Australian dollars have changed by less. The Canadian dollar has depreciated by 1.0% while the Australian dollar has gained 1.3% since the beginning of the year (Chart 2). The modest changes are surprising given the fact that oil has increased 44.4% in 2022 and other commodities are seeing robust gains. The most notable movement in currency markets is the Russian ruble, which has depreciated by 44.0%.   

Credit Spreads

• Credit conditions in Europe have undoubtedly tightened in recent weeks as indicated by European credit default swaps (CDS). Both investment grade and sub-investment grade CDS have increased notably since the beginning of the year, but remain well below the heights of the recent Global Pandemic and Sovereign Debt Crisis (Chart 3). 
• In the U.S., credit spreads are starting to drift higher. In the investment grade space, the BBB spread has increased 77 basis points since the beginning of the year and sits at 1.85%. While this is well below the levels experienced at the onset of the 2008 Global Financial Crisis (GFC) and the 2020 Global Pandemic, the BBB spread is at its highest level since July 2020. In the non-investment grade space, the increase in spreads has been more notable with the BB and B spreads increasing just over 100 basis points while the CCC spread has increased by 153 basis points. While non-investment grade spreads remain below levels experienced during recent financial turmoil, they are on par with levels last seen at the tail end of 2020.

Sovereign Bond Yields

• Bond yields in both the U.S. and Canada have provided investors with a mixed bag. After a swift increase to start 2022, which saw yields in both the U.S. and Canada increase just over 50 basis points, in part due to expectations of tighter monetary conditions, both fell around 20 basis points from their 2022 highs before regaining much of the lost ground over the past week (Chart 4). The recent fluctuations in yields reflect investors moving between flight to safety and uncertainty over rising inflation. 
• The story in Europe parallels that of North America as government yields in the UK and Germany have increased markedly over the past week gaining 31 and 34 basis points after posting sharp declines. The strong uptick in Germany yields is in part due to the European Central Bank’s plan for a faster pace of tapering under its Asset Purchase Programme, while UK investors are preparing for the Bank of England to increase its policy rate.

Short-Term Liquidity and Bank Funding

• Another gauge of tightening financial conditions are inter-bank lending rates. In Europe, the 3-month Euribor has increased a modest 8 basis points since the beginning of the year, which is significantly lower than the 33 basis point increase at the beginning of the 2020 Global Pandemic and the 98 basis point increase at the onset of the European Sovereign Debt crisis in 2010. 
• In North America, the 3-month LIBOR OIS spread and the Commercial Paper to OIS spread can provide a gauge of stress in the financial system. Both spreads have increased since the beginning of the year, but neither have approached worrisome levels. In 2008, the LIBOR-OIS spread reached a peak of 365 basis points while the Commercial Paper spread peaked at 284 basis points. Spreads became elevated again in 2020, with the LIBOR OIS and Commercial Paper OIS spread reaching 140 and 244 basis points, respectively. This will be an area for central banks to watch, as elevated funding rates would require swift action to ensure proper market functioning.

Table 1: Equity Markets

Note: All values are calculated as of March 10, 2022, except Russia which is calculated as of February 25. Source: Standard & Poor's, Toronto Stock Exchange, Financial Times, STOXX Limited, Shanghai Stock Exchange, Hang Seng Indexes Company, Korea Stock Exchange, Taiwan Stock Exchange, National Stock Exchange of India, Moscow Exchange, TD Economics.

Country	Current Drawdown	Max Drawdown Over 2022	Drawdown During Global Pandemic	Drawdown During Global Financial Crisis	Drawdown During European Debt Crisis	Drawdown During Oil Price Shock 2015	Drawdown During Asian Financial Crisis
US: S&P 500	-11.2	-13.0	-33.9	-56.8	-19.4	-14.2	-19.3
Canada: S&P/TSX Composite Index	-0.1	-4.6	-37.4	-49.8	-21.7	-24.4	-31.8
UK: FTSE 100	-7.5	-9.3	-34.9	-47.8	-18.8	-22.1	-24.8
Euro Area: Euro STOXX Price Index	-16.8	-20.3	-37.9	-61.8	-32.3	-27.4	-33.9
Australia: S&P/ASX 300 Index	-6.1	-10.0	-36.8	-54.6	-22.5	-19.1	-17.3
Japan: Nikkei 225 Average	-12.4	-15.7	-31.3	-61.4	-28.0	-28.3	-37.7
China: Shanghai-Shenzhen 300 Index	-13.1	-14.5	-16.1	-72.3	-41.0	-46.7	n/a
Hong Kong: Hang Seng Index	-16.3	-17.4	-25.3	-65.2	-34.9	-35.6	-60.1
Korea: KOSPI Index	-10.3	-12.5	-35.7	-54.5	-25.9	-15.8	-64.7
Taiwan Stock Market	-5.9	-9.2	-28.7	-58.3	-27.5	-25.7	-45.9
Singapore: Straits Times Index	-5.8	-8.5	-31.9	-62.4	-23.7	-28.5	-60.9
India: Nifty 50 Index	-9.4	-13.4	-38.4	-59.9	-28.0	-22.5	-37.5
Russia: MOEX Russia Index	-36.2	-46.9	-34.4	-73.9	-32.4	-17.9	n/a