Economy 10-10-2018

Investors underestimate the risk of financial shock: IMF

The International Monetary Fund (IMF) warns that tension is rising within the US stock market.

Investors may be overlooking the risk that financial conditions will harden abruptly and shake the global economy, warned the International Monetary Fund.

"Asset valuations are relatively high in some markets, especially the United States. In general, market participants are complacent about the risk of a severe tightening of financial conditions, "the IMF said on Wednesday in its latest report on Global Financial Stability.

The short-term risks to financial stability have had "moderate" growth , said the Washington-based lender. Interest rates remain low according to historical parameters, and financial conditions still sustain growth, he said.

However, the fund highlighted a series of markets where valuations are tightening, especially in the US stock market. US stocks have risen "well above" the valuations they had before the global financial crisis, the IMF said.

A bull run has brought US stocks to record highs this year. On the other hand, the volatility of the market seems to be too low and the spreads of high yield corporate bonds are close to historical lows, according to the fund. And in the eyes of the IMF, real estate prices seem to be inflated in several advanced economies, including Australia and Canada, as well as in the Nordic countries.

"In some advanced economies, there are investors who have become overconfident and perhaps even complacent ," Tobias Adrian, director of the IMF's currency and capital markets department, told reporters in Washington before the report was published.

But the markets are nervous lately. The S & P 500 fell for the fourth consecutive day on Tuesday while the Cboe Volatility Index, also known as the VIX or Wall Street fear index, approached 16, beating the average this year.

The fund's warning comes in coincidence with the 10th anniversary of the bankruptcy of Lehman Brothers, which plunged the world further into a financial crisis and contributed to the worst recession since the Great Depression. While the banking system is now strong, new risks have emerged and "the resilience of the global financial system has not yet been proven," the IMF said. His warning to countries is that it would be a mistake to repeal the regulations implemented after the crisis.

The IMF notes that credit conditions in emerging markets have hardened since mid-April, as a result of a stronger US dollar, an intensification of trade tensions and the political risks of each country. Argentina has taken a debt of US $ 57,000 million with the IMF , the largest in the history of the fund, to stop the country's currency crisis. The Turkish lira collapsed as investors questioned the ability of Recep Erdogan's government to contain inflation.

Global risks in emerging markets remain "moderate compared to historical levels," according to the IMF. However, debt continues to grow and conditions are likely to remain "difficult" as central banks in advanced economies raise interest rates, he said.

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