Bank of England cautions against a significant market correction
The Bank of England cautions against a significant market correction amid escalating geopolitical concerns. The Bank of England cautioned on Wednesday that financial markets are susceptible to a significant correction, as its biannual survey revealed that geopolitical events are perceived as the foremost risk to stability. The Financial Policy Committee of the Bank of England has consistently cautioned that the valuations of numerous financial assets, especially equities, are currently “stretched” and may experience a significant decline in reaction to economic or geopolitical disturbances.
A survey carried out in late July and early August revealed that 93% of the 55 banks and financial services firms that participated identified geopolitical risk as the foremost threat to the stability of the financial system. The survey, which has been conducted since 2008, recorded its highest proportion to date. Nonetheless, the policymakers at the Bank of England expressed apprehension that these risk perceptions seemed not to be mirrored in the valuations of financial assets. The Bank of England noted that significant global vulnerabilities persist, alongside ongoing uncertainty regarding the geopolitical landscape and the broader global outlook. “Markets continue to be vulnerable to a sudden downturn.”
On Tuesday, oil prices experienced an uptick while equity prices declined, following Iran’s launch of at least 180 ballistic missiles targeting Israel. The latter seems poised to execute a vigorous response, potentially paving the way for a new cycle of escalation. The Bank of England indicated that certain concentrated trades have heightened the financial system’s susceptibility to shocks. During its meeting on September 19, the Financial Policy Committee observed that hedge funds have amassed net short positions in U.S. Treasuries futures amounting to $1 trillion, marking a historic peak. The FPC expressed concern that a rapid unwinding of those positions might destabilize the market for U.S. government bonds, a fundamental pillar of the global financial architecture.
The Bank of England emphasized the necessity for financial institutions to be equipped for “severe but plausible stresses.” The Bank of England underscored the risks associated with elevated levels of government debt globally, particularly in the aftermath of the Covid-19 pandemic and the subsequent rise in energy and food prices triggered by Russia’s incursion into Ukraine. “A decline in market confidence regarding the long-term trajectory of public debt worldwide may result in increased market volatility,” it stated. The central bank indicated that households, businesses, and banks in the U.K. have demonstrated notable resilience. It was noted that although the overall burden of interest payments on mortgages for households is set to increase in the coming years, the anticipated rise will be less significant than earlier projections suggested.
