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Record-high global stock markets do not reflect the risks in the global economy, and will fall back, a deputy governor at the Bank of England has said.
Sarah Breeden, the deputy governor for financial stability at the Bank, fears that macroeconomic risks are not fully priced into equity markets. She cited concerns about private credit markets, highly valued artificial intelligence stocks, and other “risky valuations”.
Breeden told the BBC: “There’s a lot of risk out there and yet asset prices are at all-time highs. We expect there will be an adjustment at some point.”
The US stock market hit a record high earlier this week as investors shrugged off fears that the energy shock sparked by the Iran war is hurting the global economy and driving up inflation.
Japan’s Nikkei 225 index ended the day at a record closing high, lifted by a rally in technology stocks after the chipmaker Intel beat forecasts with its latest results on Thursday night.
Britain’s FTSE 100 share index is about 5% below the record high it reached in late February, just before the Iran war began.
Concerns about private credit, which involves potentially risky loans funded using investors’ money, have been growing in recent months.
The Bank warned at the end of March that valuations were particularly stretched for US technology companies focused on AI, and that investor sentiment relating to risky credit markets had deteriorated even before the conflict in the Middle East began.
Breeden told the BBC that the Bank was worried about a “private credit crunch, rather than a banking-driven credit crunch”.
“The thing that really keeps me awake at night is the likelihood of a number of risks crystallising at the same time – a major macroeconomic shock, confidence in private credit goes, AI and other risky valuations readjust – what happens in that environment and are we prepared for it?” she said.
“What we are watching for is: how might those prices fall? Will there be a sharp adjustment downwards? And if there is such an adjustment, how will that affect the economy? I’m not saying it will happen today, tomorrow, in 12 months’ time. It’s ensuring that if it happens the system is resilient,” Breeden added.
The FTSE 100 fell by over 0.5% on Friday, after Breeden’s interview was published, amid a wider market drop as traders worried that there was no sign of a breakthrough in the Iran war.
Russ Mould, investment director at AJ Bell, suggested that Breeden’s warning of a potential global stock market correction might be weighing on the City.
“It’s unusual for a Bank of England official to explicitly warn about a potential stock market pullback, and the comment might have contributed to some of the FTSE 100’s decline on Friday.
“Breeden wasn’t simply referring to the Middle East events – she also referenced concerns around a private credit crunch, high equity valuations and AI,” Mould added.
