The IMF fears a strong market correction

Photo: Andrew Caballero-Reynolds Agence France-Presse
According to the institution of Washington, the interventions of central banks and governments are fuelling a growing optimism among investors.

After having blackened his scenario post-pandemic, the international monetary Fund (IMF) has expressed concern about the decoupling between financial markets and the so-called real economy. A strong correction in risk assets is to be feared.

Wednesday, in the update of its world economic forecasts, the IMF said the “crisis is not like the others” is much worse than what was expected, and that the recovery will be slower than what was hoped for. The institution number now at 4.9 % the global recession by 2020, changing the forecast of a dip of 3 per cent made in April, in the heart of the pandemic.

But while the outlook is dimming, and the degree of uncertainty increases, the financial markets, stock Exchanges in the lead, recovering from their decline in February-march. “If some of the stock markets have recovered all of their losses, others are only at about 75% of the level where they were in mid-January. Parallel to the recovery of prices, the volatility of the stock markets has eased after reaching a peak in march […] On the credit markets, the spreads have significantly narrowed after reaching a peak, ” wrote Thursday the IMF in its June report on financial stability in the world.

According to the institution of Washington, the interventions of central banks and governments are fuelling a growing optimism among investors, who seem to rely on a scenario of rapid economic recovery in V which is not in the cards.

“This gap between the markets and the real economy raises the spectre of a new correction in the price of assets in the event of a decline in investors’ appetite for risk, which would put the recovery at risk “, is afraid of it.

“In fact, the valuations seem to be excessive on a good number of stock markets and bond markets of the company. “

As the world economy went in the pandemic, with a lot of financial vulnerabilities accumulated since the Great Recession. The IMF points out the high level of debt of countries, firms and households. The aggregate debt of enterprises stood at record levels relative to GDP. The household was in progress, in particular in countries that are less affected by the financial crisis of 2008. The pandemic has just exacerbate the risk of bankruptcy.

“In the advanced countries as in emerging countries, the debt of businesses and households could become unsustainable for some borrowers in the event of a severe economic contraction […] The deterioration of economic fundamentals has led already to the pace of failures of corporate bonds, the fastest since the global financial crisis. “

With regard to the sovereign debt crisis, ” in many of the highly indebted countries are now experiencing a slow economic extremely brutal “.

The increase in the prospective of insolvency will be put to the test ” the resilience of the banking sector “. In addition, financial firms, non-bank, even more present today, are also likely to suffer the effects, or even to amplify the voltages. The IMF gives the example of investment funds. “A brutal shock on the price of assets could cause further withdrawals of investment funds, which, in turn, would lead to bradages of assets on the part of these fund managers. “

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