FRANKFURT: Buoyant credit and stock markets appear “out of sync” with a world gripped by geopolitical and trade uncertainty, the European Central Bank said on Wednesday.
The warning came as part of the ECB’s twice-yearly Financial Stability Review, a litany of old and new risks ranging from funds depleting their cash buffers to overvalued property markets and high government debt.
In the latest edition, the ECB said investors might be underestimating the risk that the economy performs worse than expected, trade tensions escalate or an expected easing of monetary policy fails to materialise.
“Despite the drawdowns, equity valuations remain high while credit spreads still appear out of sync with underlying credit risk,” ECB vice-president Luis de Guindos said in his foreword.
The ECB described tariffs as “major downside risk”, estimating that an increase of one standard deviation in an index measuring trade policy uncertainty lowered the median growth forecast by 0.15 percentage points after four quarters.
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Such a surge in uncertainty also pushed down banks’ share prices by 10.4% after six months and increased their cost of borrowing on the bond market by 7 basis points, the ECB said.
Among other risks, the ECB listed cyber attacks, concentrated investments in private markets and growing - if still tenuous - linkages between cryptocurrencies and traditional finance.
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