The ECB warned of a correction in the markets due to political instability

Photo: Martin Leissl/Bloomberg

The increasing political instability in connection with the elections in USA and the upcoming elections in the EU countries can induce investors to abandon risky assets, says regulator

The European Central Bank has warned of the increasing risk of a sharp correction in global equity markets in the near future due to increased political uncertainty. As follows from the overview of financial stability (Financial Stability Review) published on the regulator’s website in the coming months this situation could negatively affect the European banks and countries with high debt levels.

“The probability of increased volatility in the near future is very high, and remain high chances of dramatic change in the upward trend in the markets. Growing geopolitical tensions and political uncertainty ahead of elections in major developed countries may encourage investors worldwide to abandon risky assets and seriously undermine [their] trust”, — stated in the document.

The results of a referendum on British exit from the European Union on 23 June and presidential elections in the United States on 8 November resulted in a sharp increase in volatility in global markets. Earlier, the international rating Agency S&P warned about the long-term political consequences of the British referendum for the European economy. “In Europe, the spread of populist trends. People are interested in holding a referendum about the exit of their countries from the Union,” — said the analysts of the Agency. In December in Italy held the constitutional referendum in 2017 election of the heads of state in Germany and France.

The election of the President of the United States Donald trump portends major changes in American economic policy whose consequences for the Eurozone economy it is difficult to assess, according to a survey by the ECB. “Direct is the impact of trade policy [trump supporter of protectionism], and indirectly, the fed rate hike and increased inflationary expectations in the United States” — suggests the regulator.

The past six months, the Eurozone financial system showed stability, but now the increased risks associated with possible correction of the global securities market, according to a survey by the ECB. “Recent political developments in the developed economies and the instability in emerging markets may result in further changes in asset prices”, — says the regulator.

Amid slowing economic growth, the European Central Bank predicts low profitability of the banking sector in the Eurozone. “Structural problems of the sector related to the large volume of non-performing loans, high operating costs and excess capacity”, — says the ECB.

The results of the elections in the United States, according to the regulator, in the long term can have a positive impact on banks in the Eurozone. As explained by the ECB in recent weeks, quotation of their shares rose as investors eased concerns about tightening of supervision in the banking sector and began to invest in stocks. If this trend continues, it could support the profitability of banks is low at the moment.

Wednesday, November 23, the S&P submitted a review, which warned that the weak pace of global economic growth, increased political instability in connection with the election of the United States, a referendum in the UK and political processes in Latin America, as well as low interest rates and pending upgrading of the international banking supervision in the coming year carry serious risks for banks around the world.

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