Capital markets, “especially stock markets,” are in increased risk of “sudden” declines Since “high grades”(quotes versus theoretical real value) that the recent stock market increases have generated – especially in the shares of companies linked to Artificial Intelligence (AI), where there may be a “bubble”. The warning comes from the ECB in a semi-annual report on financial stability which, in the edition published this Wednesday, warns that one of the sources of concern is in the sovereign debt and the risk that the “budget slippage” that is occurring in some countries could “rekindle fears in markets around debt sustainability“.
Financial stability report of the European Central Bank (ECB) takes on a particularly pessimistic toneeven taking into account that this is a work whose objective is, precisely, to identify risks that could shake the financial system and the economy of the euro area. The ECB points out that, in its analysis, “the economic growth remains fragile“, at a time when “concerns about the prospects of the international trade exacerbate geopolitical and political uncertainty.”
“The prospects for financial stability are worsened by growing macrofinancial and geopolitical uncertainty, together with growing uncertainty around trade policy,” said the ECB Vice President. Luis de Guindosin what will be a reference to the election of Donald Trump for a new term as US president, with promises of significant increases in customs duties.
In the ECB’s analysis, “the Risks to eurozone economic growth have turned to the downside“In other words, growth is more likely to surprise negatively than positively. If these negative risks to the economy materialize, there will be an increased risk that “high levels of debt” and “high levels of budget deficits” in “some” countries will lead to instability in financial markets.
He “budget slippage” in these countries could “reignite fears in the markets regarding the sustainability of the debt”, as occurred from 2010 with the so-called “sovereign debt crisis”.
So far, financial markets have proven to be “resilient”, although there have already been “several short-lived spikes in volatility in recent months”. But the ECB is concerned that future volatility peaks could be longer lasting and penalizing. “Underlying vulnerabilities make equity and corporate debt markets prone to higher volatility”, states the ECB, adding that “high valuations and the concentration of risks, especially in the securities markets, increase the likelihood of sudden adjustments“.
“There are signs that investors may be underestimating and undervaluing the probability and impact of adverse scenarios, as indicated by historically low equity risk premiums and spreads “Corporate bonds relatively compressed on both sides of the Atlantic,” says the ECB, indicating that stocks linked to Artificial Intelligence, in particular, may be incorporating overly optimistic scenarios in their prices.
“The concentration of market capitalization and profits in a handful of companies, especially in the US, has increased significantly in recent years. This concentration on a few large companies raises concerns about the possibility of a bubble in asset prices [ações ou outros] AI related“, says the ECB, adding that “in a context of deeply integrated global stock markets, there is a risk of adverse global repercussions if the profit expectations of these companies are frustrated.”
The ECB recommends that, “to preserve and strengthen the resilience of the financial system”, it is “advisable that macroprudential authorities [como o Banco de Portugal] maintain the current capital reserve requirements” required of banks. In addition, authorities must ensure that banks only extend credit to customers following “sound credit standards.”
Source: Observadora
