Warning from ECB about significant correction in markets due to risk-taking

It was today that the European Central Bank (ECB) gave out a warning that even though there have been decent levels of economic growth seen throughout the European area, they are concerned with what has been a sharp increase in the levels of volatility as of late.

They highlighted how the risk of a significant correction of the markets across the world still remains. This is despite the markets being extremely bullish this year to date, with many of them constantly hitting new highs.

Thankfully, the systemic indicators that the ECB utilises have remained low during the previous 6 months, but this does not mean that there are no risks present.

Since th start of this year, the S&P 500 has been 16% and the European Stoxx 600 has seen a rise f 7%. In recent days and weeks, there have been some positive earnings announcements which have helped markets, as well as the prospects of more tax cuts in the United States, as well as continued deregulating in the bank system which has led to price rises in equites.

There is a general feeling of optimism around the markets, which is why the ECB is trying to remain cautious and reel in these feelings. When money managers come to the realisation that they have perhaps taken on excessive risk, the markets could see a nosedive as these players re-adjust and try to cover their downsides.

All of this information as released in the ECB’s Financial Stability Review report that came out this morning.

It was in May that the ECB also gave warnings about significant risks they potentially saw within the Eurozone even though they appeared to be well contained. This led to some repricing when it came to the bond markets, as banks looked to slowly improve their balance sheets and the levels of debt sustainability.

While this pressure has eased off since May, the central bank’s profits were damaged by a high quantity of loans that were under-performing for the period.

With political uncertainty abound in Germany and Britain due to political impasses and Brexit respectively, these pose further threats to markets until the future becomes clear. Both of these events could lead to an increase in the borrowing costs for both companies and governments.

The ECB is still committed to supporting the European region and this is why during October they made an announcement related to their extension of the quantitative easing program they have been using over the past number of years. While starting in January the number of monthly purchases will be decreased to EUR 30 billion from the previous amount of EUR 60 million, these will be continuing until at least September of 2018. This is something that was expected, but the European economy as a whole will have these changes priced into the markets already.

Thankfully in general in 2017, the European economies have seen growth return to their nations, having been squashed during the recent sovereign debt crisis. It is next month that the ECB will update their forecasts, with GDP expected to be approximately 2.2% for the year and inflation to be 1.2%.

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