Model Identifies 3 Shocks Driving Euro Area, US Markets as Middle East Tensions Lift Europe Supply Risk to 65%
Updated
Updated · CaixaBank Research · May 18
Model Identifies 3 Shocks Driving Euro Area, US Markets as Middle East Tensions Lift Europe Supply Risk to 65%
1 articles · Updated · CaixaBank Research · May 18
Summary
Three macroeconomic shocks—demand, supply and monetary policy—explain major moves across euro area and US assets in a model built on daily high-frequency data from June 2005 onward.
Principal component analysis of rates, bonds, Inflation swaps, equities, currencies and commodities links each market session to the dominant driver through characteristic co-movements such as rising stocks and yields for demand shocks or weaker currencies and lower rates for dovish policy shocks.
40%-50% of euro area sessions during the global financial crisis, sovereign debt crisis and COVID-19 were demand-driven, but supply shocks rose to 33% during the Ukraine war and 65% during current Middle East tensions.
33% of US sessions during the Ukraine war and 40% during the recent Iran episode were dominated by monetary policy shocks, suggesting investors there focus more on the Federal Reserve path than on direct energy-price exposure.
A seventh component tied to gold had limited explanatory power until mid-2024, but in some 2026 weeks it became the most important aggregate driver, indicating newer market narratives beyond the model’s main three shocks.