Financial markets at risk of 'sharp correction', warns Bank of England
Newsflash: The Bank of England has warned that financial markets remain at risk of a sharp correction.
In its latest financial stability report, the BoE says that high inflation, or geopolitical risks, could trigger a selloff.
The Bank says risks to the UK financial system are “broadly unchanged” since the first quarter of the year.
But some asset prices have continued to rise, it points out, while the risk of a sharp correction persists.
European markets are up around 8% so far this year, while the US Nasdaq Composite index has surged by 18%.
The report, which is designed to track the stability of the financial system, says:
The prices of many assets such as shares and bonds remain high relative to historical norms, and some have continued to rise. This suggests that investors in financial markets are continuing to expect the economy to recover and inflation to fall. They are placing less weight on risks, such as geopolitical developments or continued high inflation, that might cause weaker growth or interest rates to stay higher than expected.
These risks make it more likely that there could be a sharp correction in asset prices that could ultimately make it more costly and difficult for UK households and businesses to borrow.
The prices of many assets such as shares and bonds remain high relative to historical norms, and some have continued to rise. This suggests that investors in financial markets are continuing to expect the economy to recover and inflation to fall.
They are placing less weight on risks, such as geopolitical developments or continued high inflation, that might cause weaker growth or interest rates to stay higher than expected.
These risks make it more likely that there could be a sharp correction in asset prices that could ultimately make it more costly and difficult for UK households and businesses to borrow.
There are new signs of weakness in the US housing market today.
Contracts to buy U.S. previously owned homes unexpectedly fell in May, by 2.1%, indicating that high mortgage rates and expensive homes are deterring buyers.
The National Association of Realtors (NAR) reported that pending home sales fell in the densely populated South and the Midwest on a monthly basis, but rose in the Northeast and West.
Year-over-year, all U.S. regions registered reductions.
“The market is at an interesting point with rising inventory and lower demand,” said NAR chief economist LawrenceYun, adding:
“Supply and demand movements suggest easing home price appreciation in upcoming months. Inevitably, more inventory in a job-creating economy will lead to greater home buying, especially when mortgage rates descend.”
US Pending Home Sales not looking good - real estate market heavily under pressure pic.twitter.com/qCAGQ5e24u
Labour shadow business secretary has said the party would rather have stability in the UK’s relationship with the Europe than try to seek accelerated economic growth by rejoining the EU’s single market or customs union.
Addressing the British Chambers of Commerce (BCC) conference on Thursday, Jonathan Reynolds acknowledged that Brexit had been “very difficult for businesses” because it erected trade barriers, but said reopening the debate would be worse.
With less than a week to go until polls open in the general election, Reynolds was trying to woo business leaders at the London event with a pitch that emphasised policy stability and encouraged businesses to invest.
Back in the UK, a former Bank of England policymaker has predicted the central bank could cut interest rates at its next meeting in August.
Michael Saunders, who served on the Monetary Policy Committee from 2016 to 2022, believes the BoE would start to lower borrowing costs if inflation and wage data align with its forecasts.
Saunders told the Reuters Global Markets Forum (GMF) today:
“They have clearly signalled they are willing to cut soon if data are okay.
“If so, I would expect the rest of the internal (members of the BoE MPC) to move as a bloc to vote for a cut.
Despite the small upgrade to US growth in January-March, the economy still slowed compared with the October-December.
Richard Flax, chief investment officer at Moneyfarm, says:
“The third reading on US first quarter GDP came in at an annualised 1.4% according to revised figures, up from the predicted 1.3%, but lower than Q4 2023’s strong print of 3.4%. This tepid growth continues to highlight concern of a broader economic slowdown.
“The increase in real GDP primarily reflected increases in consumer spending, residential fixed investment, non-residential fixed investment, and state and local government spending.
“Looking ahead, forecasts suggest a potential rebound in GDP for the second quarter, with estimates pointing to growth rates of 3% or more, similar to the robust performance seen in the latter half of 2023. However, several factors could temper expectations for the rest of the year, including the state of inflation, high interest rates, and the impending presidential election. All these factors may force businesses to adopt a cautious stance on new investments.”
Today’s US GDP report also shows that Americans earned, and saved, a little less than previously estimated in the first quarter of the year.
Disposable personal income increased $240.2 billion, or 4.8 percent, in the first quarter, a downward revision of $26.6 billion from the previous estimate. Real disposable personal income increased 1.3 percent, a downward revision of 0.6 percentage point.
Personal saving was $777.3 billion in the first quarter, a downward revision of $19.3 billion from the previous estimate. The personal saving rate—personal saving as a percentage of disposable personal income—was 3.8 percent in the first quarter, the same as the previous estimate.
