Markets are underestimating geopolitical risk, ECB’s De Guindos says

Markets are underestimating geopolitical risk, ECB’s De Guindos says

Europe’s macroeconomic outlook is brighter – but markets may be underestimating the potential for sudden destabilization due to geopolitics, the vice president of the European Central Bank said on Thursday.

“We are talking about the election cycle that will take place not only in the US but also in Europe. And at the same time we refer to geopolitical risks. “I think that markets sometimes underestimate the potential impact of existing geopolitical risks,” Luis de Guindos told CNBC’s Annette Weisbach.

Markets are good at balancing financial and economic risks but struggle to incorporate the separate dimension of geopolitical risk, which is often viewed as an all-or-nothing binary, he said.

Stock markets in Europe and the United States have risen to record highs this year, weathering the impact of ongoing wars in the Middle East and Ukraine as well as a series of upcoming elections in which half of the world’s adult population will vote.

The ECB published its latest financial stability report on Thursday, saying financial stability in the euro area had improved due to a better economic outlook and falling inflation.

Rising geopolitical risks pose “significant downside risks,” the ECB warned in the report. Given factors such as rising debt service costs, signs of peaking bank profits and the ongoing commercial real estate downturn, risks remain “high” by historical standards, she added.

The report attributes the recovery in financial markets to analysts’ expectations that major central banks will cut interest rates this year.

“There is increasing evidence of pricing for perfection [are] This creates the potential for outsized market reactions to disappointments,” the report said.

De Guindos said the ECB had not taken specific results into account in the election results, but that overall they brought with them the possibility of further fragmentation of the global economy.

The ECB Vice President noted an increase in tariffs and the implementation of protectionist measures by some countries. “This will lead to fragmentation of trade and growth and reduce the potential growth of the global economy,” he said. “In addition, there are the risk factors from Ukraine and the Middle East.”

An abrupt market correction represents a “potential vulnerability,” warned De Guindos. “This is a risk that we will have to take into account in the future.”

“And that’s the element you can’t ignore. You cannot overlook these potential impacts that could impact risk aversion, risk attractiveness, commodity prices, growth and the overall growth of the global economy.”

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2024-05-16 13:20:11