The European Central Bank said on Wednesday that activity in credit and stock markets appears “out of sync” with a world beset by geopolitical and trade uncertainty.
The warning was part of the ECB’s twice-yearly financial stability review, which lists a range of old and new risks, including funds running out of cash buffers, overvalued real estate markets and high government debt.
In the latest version of its report, the ECB said investors may be underestimating the risk of a worse-than-expected economic performance, an escalation in trade tensions or a failure to materialize of expected monetary policy easing.
“Despite the withdrawals, equity valuations remain elevated, while credit spreads still appear out of sync with underlying credit risks,” ECB Vice President Luis de Guindos said in a foreword.
The ECB described the tariffs as a “significant downside risk” and estimated that a one standard deviation increase in an index measuring trade policy uncertainty would reduce the median growth forecast four quarters later by 0.15 percentage points.
The surge in uncertainty also caused banks’ share prices to fall 10.4% after six months and increased their borrowing costs in bond markets by 7 basis points, the ECB said.
Other risks listed by the ECB include cyberattacks, concentrated investments in private markets and the growing (albeit still fragile) links between cryptocurrencies and traditional finance.
