Andrew Bailey: Stock markets could crash if debt levels spiral
Bank of England Governor Andrew Bailey has warned that stock markets could suffer a “disorderly adjustment” due to spiralling debt levels and other vulnerabilities.
Ahead of a seminal week in Washington DC where global financial leaders are set to discuss the future of multilateralism, Bailey said bullish markets and spiralling sovereign debt levels had left the wider system in peril.
Bailey, who chairs the Financial Stability Board (FSB), called on G20 nations to work together to ensure financial systems remained stable.
“While most jurisdictions have seen a rebound in financial markets in recent months, valuations could now be at odds with the uncertain outlook, leaving markets susceptible to a disorderly adjustment.”
“The need for global standards and cooperation therefore remains abundantly clear. Not just to prevent crises, but because ultimately a resilient system allows the efficient allocation of capital, enabling the G20 and its member economies to focus on supporting sustained growth.”
The top central banker warned that “sovereign debt levels have continued to increase and are forecast to rise further,” adding “vulnerabilities in the financial system remain high.”
Bailey said that regulators and central banks “cannot lose sight of emerging risks”, as he vowed to beef up “surveillance capabilities” in financial markets.
“Whether it is the rise of private finance, the implications of geopolitical tensions, or the increasing role of stablecoins for payment and settlement purposes, our ability to detect and address emerging risks is critical,” he said.
Bailey warns of AI risks
In a letter to global finance ministers, Bailey said the FSB was working to refine cross-border payment systems to “support economic growth” and improving transparency levels.
He also said the board would review the use of stablecoins and other crypto assets, warning that “gaps remain in addressing financial stability risks”. He also said the global financial watchdog had to better monitor different financial markets and models.
In particular, Bailey pointed to the risk AI adoption could have on cyber risks and third-party dependence, though innovation should also be encouraged in the technology sector.
Last week, both the IMF and Bank of England’s Financial Policy Committee warned of a “sharp contraction” in markets due to a boom in AI stocks.
The Bank said that a “crystallisation of such global risks could have a material impact on the UK as an open economy”.
Analysts at Barclays warned that traders had “FOMO” – fear of missing out – though “circular funding” could undo a sharp boom.
The UK government is largely relying on the AI sector to boost growth and productivity in the next few years.
Morgan Stanley warns of tariff hit to stock markets
Open trade relations will also prove to be pivotal for boosting growth after deals have been struck with the US, India and the EU.
But a new report by Morgan Stanely has suggested that Trump’s erratic trade policy could also threaten markets.
Analysts said US stocks could plummet by as much as 11 per cent if the US and China fail to find common ground on trade.
Trump said on Friday that he would impose an additional 100 per cent tariff on Chinese goods after the country tightened its rules on rare earth material exports, leading to the biggest stock selloff in the US since the aftermath of “Liberation Day” in April.
China hit back and said it could introduce “countermeasures”, leading to a drop in stock markets across the Shenzhen Composite Index and Hong Kong’s Hang Seng.
On Sunday, Trump opened the door to a possible deal after he said Chinese president Xi Jinping “just had a bad moment”, prompting traders to back the ‘TACO trade’, which stands for “Trump Always Chickens Out”.
But Morgan Stanley warned the looming threats from a breakdown in trade between the two biggest economies could hit financial markets.
US equity strategist Michael Wilson said: “If associated trade uncertainty and volatility continue into early November, we could see a larger correction than most are expecting.”