Global Finances Tightest Since 2009: Goldman Sachs

Global financial conditions have reached their tightest since May 2009, a possible sign of a world economic slowdown, according to a widely watched Goldman Sachs index.

Tightness in financial conditions corresponds to lower availability of funding in the economy and impacts on the spending, saving and investment plans of business and households. Goldman's index rose to 100.92 points as of Thursday, 130 basis points tighter than before Russia's military operations in Ukraine began on February 24.

Conditions in emerging markets reached their tightest since December 2008, at 102.47 points. Russian conditions are at their tightest on record, at 128.83 points, the data showed, having stood at around 98 at the start of February.

The tightening is a challenging development for a world economy already threatened by the knock-on effects of surging commodity prices and supply chain setbacks.

Richard McGuire, head of rates strategy at Rabobank, expects conditions to tighten further. He commented: "Central banks are focused on inflation rather than growth so any hope of a conciliatory stance reflective of the fact that demand is weakening is likely to be disappointed.”

The European Central Bank surprised markets on Thursday when it outlined plans to end its bond purchases in the third quarter, paving the way for rate hikes. Given the economic hit from the Ukraine crisis, many investors had expected it to refrain from making firm commitments.

Commodity importers including China, Turkey, Korea, Japan and India may be hardest hit by the price pressures resulting from sanctions against Russia, ratings agency Moody's said.

McGuire added: "You have to brace yourself for demand destruction either delivered by central banks, which in itself tightens financial conditions, or, via eroded profit margins, negative real income growth without central bank growth.".

That can cause further market selloffs, another channel through which conditions tighten, he said.

None of the metrics Goldman tracks signal relief. The dollar is near two-year highs, world stocks have fallen more than 10 percent this year and companies' borrowing costs are sharply higher as investors assess the hit to companies' profits. (Reuters)