Bank of England says global asset prices remain ‘stretched’ By Reuters

By David Milliken and Suban Abdulla

LONDON, Oct 2 (Reuters) – Global asset prices remain stretched and vulnerable to a sharp decline as investors grow more concerned about geopolitical risks, the Bank of England said on Wednesday.

The BoE said overall risks to British financial stability were unchanged from its last assessment in June, but that it would be wrong to get comfortable with a quick recovery in asset prices after a slump in August.

“Valuations in several asset classes, especially equities, quickly returned to stretched levels following the episode. Markets remain susceptible to a sharp correction,” the BoE’s Financial Policy Committee said in a quarterly statement.

Weak US employment data and weaker-than-expected results from major tech companies led to a market sell-off in August that only reversed after stronger macroeconomic data was released – a boost that investors should not be relied upon to repeat itself, the BoE said.

“Global vulnerabilities remain significant, as does uncertainty around the geopolitical environment and global outlook,” the BoE said.

A twice-yearly BoE survey of major financial firms operating in Britain showed that concerns about geopolitical risk had risen to the highest level since the survey began in 2008, the central bank said.

This survey was based on responses from 55 firms between July 23 and August 12 and did not specify which sources of geopolitical risk were of greatest concern.

In addition to the conflict in the Middle East and Ukraine, the US presidential election remains in focus.

The BoE noted that since June, hedge funds’ net short position in US government bonds rose to $1 trillion from $875 billion. If they need funds to unwind those positions because of changing risk perceptions, losses or other factors, this cold snap has led to “severe” stresses, the BoE said.

The central bank also said high levels of public debt in major economies could trigger risks to financial stability if investors took a gloomier view of government borrowing.

Britain’s public debt has risen to 100% of national income – middling by the standards of advanced economies – and Chancellor of the Exchequer Rachel Reeves is due to present her first annual budget on October 30 after the Labor Party election on July 4.

Looking specifically at Britain, the BoE said most households and businesses were coping well with high interest rates, although there were some areas of difficulty for small businesses and those backed by private equity investors.

In August, the BoE cut its key interest rate to 5% from a 16-year high of 5.25%, before keeping it unchanged at 5% in September. Financial markets see a 90% chance of a further cut to 4.75% on November 7 after the next BoE meeting.

Lower interest rates meant mortgage costs for households whose fixed-rate mortgages were due to expire next year would rise less than previously expected, the BoE said. Overall, the debt interest burden would be much lower than after the global financial crisis.

The increase in mortgage costs for the average household would be £150 a month, down from £180.

The central bank estimated last month that the economy would grow by 0.3% per quarter in the second half of 2024, about the UK’s long-term growth rate but less than in the first half of the year, when the economy recovered from a shallow recession that occurred at the end of 2023.

The FPC also said it was keeping the countercyclical capital buffer – a tool it uses to manage risks in banks’ credit cycle – unchanged at 2%.