IMF warns investors that the rally in the global stock market is a gamble

26-06-2020

The IMF report said the S&P500 index is on the decline with signs of a deep recession in the U.S. 

The International Monetary Fund warned that the global stock market rally posed a risk to investors: central banks would ignore the risks of a debt build-up and continue to provide support at current record levels.

In its semi-annual update on global financial stability, the IMF said central banks played a key role in the recovery in stock prices after the Covid-19 plunge, but there is now a disconnect between financial market optimism and the depressed state of the economy. 

The IMF said investors are “clearly banking on continued and unprecedented support from central banks,” adding that the gap between markets and the real economy has raised the risk of another drop in asset prices, which will hurt prospects for recovery.

“Markets appear to be expecting a quick” V-shaped “recovery inactivity,” the report said, noting that Wall Street’s top leader, the S & P 500, has lost consciousness with signs of a deep U.S. recession.

The world’s biggest central banks have bought $6 trillion (£4.75 trillion) worth of assets since January, more than double the amount bought during the 2008 global financial crisis. The unprecedented support meant stock prices returned to 85 percent of their pre-crisis levels, but the IMF said there was no guarantee the positive sentiment would continue.

Stock prices have been under pressure in recent days as Covid-19 cases are on the rise in the U.S., leading to increased nervousness.

The IMF said that the second wave of infections was one of many factors that could lead markets to lower. Such an outcome “could add financial stress amid an already unprecedented economic downturn.”

The report said expectations about the extent and duration of central bank support for financial markets may be too optimistic, as trade tensions could resurface and there is a risk of social unrest around the world in response to rising inequality.

He added that after a decade of low-interest rates, corporate and household debts were at high levels. A pandemic could bring these underlying vulnerabilities to the surface.

The IMF stated that “many highly indebted countries are now expecting an extremely sharp economic downturn. This deterioration in key economic indicators has already led to the highest rate of corporate bond defaults since the global financial crisis, and there is a risk of a broader impact on the solvency of companies and households.”

Rising insolvency will test the resilience of banks, even if they are in better shape than in the 2008 crisis.

The IMF has said that central banks need to be aware of the risk that short-term emergency measures may have adverse long-term consequences.

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