The International Monetary Fund (IMF) has warned investors they may be ignoring the possibility that the financial system could contract sharply and send shockwaves through the global economy.
In a Global Financial Stability Report released today, the IMF said, “asset valuations appear to be relatively high in some markets, notably in the United States”, and that “market participants appear complacent about the risk of a sharp tightening of financial conditions”.
The Washington-based lender went on to note that while short-term risks to the stability of the global economy have risen “moderately”, and that interest rates remain at historical lows, financial conditions around the world continue to support growth.
The IMF report continued by highlighting several markets in which prices were becoming stretched, especially in the U.S. stock market. According to the report, U.S. stocks have climbed “well beyond” their pre-crisis levels. Indeed a strong bull run has pushed U.S. stocks to record levels this year.
And, while prices continue to climb, volatility is down and the spreads offered on high yield corporate bonds / debt securities are approaching record lows.
Too Much Confidence
IMF director Tobias Adrian spoke to reporters in Washington ahead of the report’s release. He said, “In some advanced economies, some investors have grown overly confident and even possibly even complacent”.
This warning from the IMF comes a decade after Lehman Brothers filed for Chapter 11 bankruptcy protection – a move that pushed the global economy further into financial crisis and sparked the worst and longest-lasting recession since the Great Depression.
And while the international banking system is in better health now than it was in 2008, new challenges have arisen and, according to the IMF report, “the resilience of the global financial system has yet to be tested”. The report went on to warn policy-makers against rolling back safeguards put in place after the financial crisis.
The International Monetary Fund report notes that credit conditions have contracted in emerging markets over the last six months, drawn-in by a more robust U.S. dollar and rising international trade tensions. Argentina, moving to halt its currency crisis, is borrowing up to U.S. $57 billion from the IMF, the biggest loan in the organisation’s 72-year history.
Per the IMF report, risks remain “moderate compared with historical levels” in emerging markets, although debt continues to grow, and the outlook is “likely remain challenging” as central bank policy chiefs in more advanced nations begin to raise interest rates.
Speaking at a briefing in Bali, IMF director Tobias Adrian said, “That is going to trigger some outflows of capital that has flown very strongly from advanced economies to emerging markets in recent years. In adverse scenarios, that can be an abrupt reversal of flows”.
This article is for educational and informative purposes only and should not be considered as investment or trading advice.