To read this content please select one of the options below:

Financial market buoyancy is fragile amid rising risks

Tuesday, January 28, 2020

Subject

Financial market momentum.

Significance

Global bond and equity markets continue to rally after making their largest annual gains since 2010 last year. Markets are brushing off a plethora of risks, from the escalation in tensions between Tehran and Washington to concerns about weak global growth, particularly in Europe. While valuations are becoming dangerously stretched -- the forward price-to-earnings ratio of the benchmark S&P 500 index is at the highest since 2011 -- the absence of a credible catalyst for a sharp sell-off is helping to underpin positive sentiment. Financial conditions remain exceptionally loose.

Impacts

  • Demand for government bonds is building momentum and the ten-year US treasury yield is just 40 basis points above its all-time low of 2017.
  • Emerging-market bond and equity fund inflows have momentum and while several risks could curb this, a sustained reversal is unlikely.
  • The Shanghai stock market has lost 5% since Wuhan’s coronavirus outbreak spread beyond China on January 13; further falls are likely.
  • Despite low market volatility, government debt markets are much more pessimistic than equity markets about global growth prospects.

Related articles

Expert Briefings logo