FILE PHOTO: Traders Wear Masks While Working on the Floor of the New York Stock Exchange as the Outbreak of Coronavirus Disease (COVID-19) Continues in the Manhattan District of New York, USA, May 28 2020. REUTERS / Lucas Jackson / File Photo
(Reuters) – Stock markets and other risky assets could suffer a second blackout if the coronavirus spreads more widely, blockades are re-imposed or trade tensions escalate, the International Monetary Fund warned on Thursday.
Equity markets fell into bearish territory in record time earlier this year, as the virus and related blockages reduced sentiment, but have generally rebounded from their March 23 low. The S&P, which fell 34% in just 23 trading days, has been fueled by support from the central bank and is now roughly 10% off its all-time high.
A “disconnect” has emerged between financial markets and economic prospects, according to the report, from Tobias Adrian, Director of the IMF’s Capital and Monetary Markets Department and Fabio Natalucci, deputy director of the department. That “raises the specter of yet another correction in risk asset prices,” with valuations in many equity and corporate bond markets “stretched.”
The warning came just a day after the IMF further cut its global economic forecasts for 2020.
A correction could be caused by a deeper and longer recession than currently anticipated, a second wave of the virus, or re-established containment methods. A broadening of global social unrest in response to growing economic inequality could also hurt investor sentiment, the IMF said.
“We are concerned with scars in the economy, which means the crisis could be longer than expected and deeper than expected,” said Adrian. “The scars are due to the high level of unemployment and the potential for insolvency. They are difficult to reverse. ”
A sharp correction in asset prices could lead to large outflows of investment funds, as seen earlier in the year, possibly triggering the sale of assets, Adrian reported.
The IMF said that as banks entered the crisis with more liquidity and capital buffers, insolvencies will test the resistance of the sector.
Report by Megan Davies; Edition of Dan Burns, Tom Brown and Andrea Ricci
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