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Market volatility and policy uncertainty weighing on global financial conditions

Publication Date: 19 Jul 2018 - By ReachX Team By ReachX Team
Actionable
Differentiated

Macro FX & Rates Fixed Income/Credit USA China UK EU ex-UK Asia ex-China MENA

Increased market volatility linked to rising trade tensions, elevated geopolitical risk and policy uncertainty and weaker corporate creditworthiness weighed on global financial conditions in the first half of 2018, according to a new report.

In a note to its clients, ratings agency Moody’s said declines in US and other equity indices have accompanied the threat and subsequent imposition of US tariffs on a range of countries and exports, and the proportionate and reactive tariffs on US goods from China, the European Union and others.

Concurrently property prices dipped in most countries during the first half of this year, with price levels generally below 10-year averages relative to nominal GDP. However, house prices remain elevated in a few markets, including Norway, Sweden, New Zealand and Australia.

On the banking side, Moody’s said funding could be a key risk in some markets if investor confidence erodes and funding dries up. The Turkish banking system is the most exposed to funding shocks, it added.

Any tightening in financial conditions could strain vulnerable emerging market currencies and bonds, the agency noted further.

"The most vulnerable sovereigns are generally those with low debt affordability, shorter maturities and high debt levels. While some frontier market sovereigns are among the most vulnerable countries, Argentina and Turkey show the highest risk among emerging markets," it said. 

But it added that the recent rally in US government bond yields reflects the solid economic recovery and rising US inflation expectations, which for now look “consistent with the Federal Reserve's target.” In contrast, government yields in the euro area core countries remain compressed as the economic cycle and monetary policy lags that in the US.

"While systemic financial risks have increased somewhat in the first half of 2018, the continued easing in credit standards suggests investor risk appetite remains strong. However, credit spreads are likely to widen significantly if risks crystallise," said Colin Ellis, Managing Director (Credit Strategy) at Moody’s.

 

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