(Reuters) -Goldman Sachs on Tuesday said it has introduced a new Financial Stress Index (FSI) that, while tightening over the last two days of market ructions, remains at relatively normal levels by historical standards.
Most of the tightening has come from surprisingly high levels of expected volatility in the equity and bond markets, Goldman economists said in a client note. Conditions in short-term funding markets remain broadly stable.
"So while market stress is noticeably higher than a week ago, our FSI suggests that there have been no serious market disruptions to date that would force policymakers to intervene," Goldman said.
The note also said that Goldman's Financial Conditions Index after the sharp falls in the U.S. equity market and the benchmark Treasury yield, along with changes in other asset classes, imply a roughly 12 basis point net reduction in gross domestic product growth over the next year.
Unwinding of short-yen carry trades, combined with softer-than-expected U.S. job data on Friday and disappointing earnings from major tech firms, triggered a panicky global equity shakeout, sending investors rushing for the safety of U.S. Treasuries and forcing their yields lower amid concerns about how well financial markets would cope with elevated risk.
The FCI is not designed to measure market stress, while the FSI will monitor risks to market functioning. In addition to expected bond and stock volatility, the FSI includes interest rate differentials across U.S. and international short-term funding markets, Treasury swap spreads and credit and equity funding cost spreads. Unlike similar stress indexes maintained by the Federal Reserve banks of St. Louis and Kansas City, the firm's FSI will be published daily.
In its note, Goldman estimated every further 10% sell-off in equities would reduce U.S. GDP growth over the next year by about 45 basis points (bps).
"If we include the moves in other asset classes that usually accompany equity market selloffs when growth fears arise, the total hit is around 85 bp," the note said.
It added that if the starting pace for GDP growth is over 2%, it would likely take a large further sell-off to "single-handedly" push the economy into recession.