By Paul Hannon
Financial markets remain vulnerable to a sharp correction, the Bank of England warned Wednesday as a twice-yearly survey found that geopolitical developments are seen as the greatest threat to stability.
The BOE's Financial Policy Committe has repeatedly warned that valuations of many financial assets, particularly equities, are "stretched" and could fall sharply in response to economic or geopolitical shocks.
In a survey conducted in late July and early August, the BOE found that 93% of the 55 banks and other financial services firms that responded placed geopolitical risk as the leading threat to the stability of the financial system. That was the highest proportion in the history of the survey, which goes back to 2008.
However, BOE policymakers were concerned that those perceptions of risk did not appear to be reflected in the pricing of financial assets.
"Global vulnerabilities remain material, as does uncertainty around the geopolitical environment and global outlook," the BOE said. "Markets remain susceptible to a sharp correction."
Oil prices rose and equity prices fell Tuesday as Iran launched at least 180 ballistic missiles at Israel, which appears determined to carry out a robust response, opening the way to a new spiral of escalation.
The BOE said some concentrated trades added to the vulnerability of the financial system to shocks. In its Sep. 19 meeting, the FPC noted that hedge funds have built net short positions in U.S. Treasuries futures of $1 trillion, a record high. The FPC worried that a sudden unwinding of those positions could disrupt the market for U.S. government bonds, which is the cornerstone of the global financial system.
"It was important for financial institutions to be prepared for...severe but plausible stresses," the BOE said.
The BOE also highlighted the threat posed by high levels of government debt around the world in the wake of the Covid-19 pandemic and the surge in energy and food prices that followed Russia's invasion of Ukraine.
"A deterioration in market perceptions of the long-term path of public debt globally could lead to market volatility," it said.
The central bank said U.K. households, businesses and banks remained resilient. It said that while the total cost to households of paying interest on their mortgages will rise further over coming years, the increase will be smaller than it had previously expected.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
October 02, 2024 05:46 ET (09:46 GMT)
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