By Vicki Schmelzer

NEW YORK (MNI) – The market’s various indicators, aimed at gauging
risk taking, have been flashing mild warnings in recent sessions.

While these signals point to additional volatility in coming days,
analysts stressed that risk aversion is currently well below that seen
in the final months of 2008/early 2009.

One highly-watched indicator, the Chicago Board Options Exchange’s
volatility index or VIX, was trading at 35.23 Monday, after holding in a
34.72 to 35.66 range.

The index topped out at 48.20 (May 21) at the peak of EMU debt
jitters and then subsequently moved lower, bottoming May 26 at 29.39 and
then rebounding to post a high of 36.11 last Friday before closing at
35.48.

Technical analysts at CitiFX noted the VIX has held support “just
above 29% and is potentially forming a double-bottom pattern with a
neckline at 35.68%.”

A close above 35.68 “would open the way for 42%,” with rising
volatility typically going hand in hand with U.S. stock weakness,” they
said.

In addition to the VIX, market players have also been keeping an
eye on both the Kansas City and St. Louis Financial Stress Indexes.

The Kansas City Federal Reserve Bank describes the FSI as “a
monthly measure of stress in the U.S. financial system based on 11
financial market variables.”

“A positive value indicates that financial stress is above the
long-run average, while a negative value signifies that financial stress
is below the long-run average,” the Kansas City Fed said.

The last KCFSI was released May 10 and showed that the FSI narrowed
to -0.23 in April from -0.27 in March. The FSI stood at 0.24 in December
2009 and at 4.43 in December 2008.

“The April uptick followed substantial declines in February and
March — as a result, the KCFSI remained below its long-run average and
close to its level in July 2007, when the financial crisis was just
beginning,” the KCFSI said at the time.

The Kansas City Financial Stress Index for May will be released
Tuesday.

In January 2010, the St. Louis Federal Reserve announced the
creation of their own Financial Stress Index, similar to the KCFSI, but
with 18 variables, and released weekly (1:30 central time Thursday).

The St. Louis FSI takes into account factors such as the effective
fed funds rate and two, ten, and 30-year Treasury yields to the Merrill
Lynch Bond Market volatility index and JP Morgan Emerging Markets Bond
Index Plus, with each variable capturing “some aspect of financial
stress.”

Credit Suisse economists have decided to more closely monitor the
St Louis Financial Stress Index.

“The St. Louis Financial Stress Index (STLFSI) was developed by the
St. Louis Fed to help policymakers identify periods of financial stress
that are cause for concern,” they said.

In response to recent volatility in financial markets, STLFSI has
been edging higher in recent sessions, although “is nowhere near the
crisis levels of 2008,” Credit Suisse said.

As background, the STLFSI reached 0.69 the week of the 9/11 attacks
and 1.08 post Enron/financial reporting snafus.

In September 2008, during the week Lehman declared bankruptcy, the
index posted a high of 2.46, and then peaked at 5.01% four weeks later.

More recently, the index climbed from a low of 0.10 April 9, to a
high of 0.872 for the week ending May 28, 2010 (latest available data
released June 3).

Goldman Sachs has had its own Financial Stress Index since 1990.

More recently, the GSFSI has also moved higher, but remains well
below the peaks seen in the 2008.

“While the update of the Financial Stress Index reveals an increase
in financial stress, funding conditions remain overall in-line with
historical norms, and we do not expect short-term liquidity risk to be
remotely close to 2008 Q4 measures,” Goldman strategists said.

Goldman looks at moves in the unsecured inter-bank funding market,
signs of stress in the secured funding markets (spread of Agency MBS to
Treasury repo rates), growth of the commercial paper market, and the
ratio of total assets in money market mutual funds to equity market
capitalization.

“Even if short-term funding pressures were to escalate further, we
think central banks, and the Fed in particular, are well equipped to
deal with an escalation of liquidity pressures,” they said.

Goldman maintains that the Fed can, if needed, quickly reactivate
such programs as the Term Auction Facility (TAF), the Primary Dealers
Commercial Paper Facility (PDCF) or the Commercial Paper Funding
Facility (CPFF).

** Market News International New York Newsroom: 212-669-6430 **

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