Financial conditions have eased, but the risk that equity and bond markets face a fundamental revaluation is high, and likely being underestimated, Moody’s Ratings says.<\/p>\n
In a new report, the rating agency said that it expects global financial conditions to remain benign in 2025 as the global economy stabilizes, inflation eases, and monetary policy normalizes.<\/p>\n
“Central banks will likely continue to ease monetary policy, supporting favorable credit conditions and bond market liquidity,” the report said.<\/p>\n
Against this backdrop, pressure on corporate balance sheets is expected to decline, as borrowing costs ease, leading to lower default risks.<\/p>\n
However, this relatively rosy base case faces risks from abrupt shifts in U.S. trade and immigration policy, which could “reignite” inflation, dampen global growth, and increase the volatility of financial markets, it cautioned.<\/p>\n
Other key risks to the benign outlook include escalating geopolitical tensions, and further structural issues in China’s economy, which could also disrupt the economic outlook.<\/p>\n
“Additional risks include the softening U.S. labour market, sluggish growth in the euro area further aggravated by the resurgence of political instability in France and Germany, and steepening real estate market corrections,” it said.<\/p>\n
In particular, the risk of asset repricing is high for global equities, bonds, and exchange rates, the report said.<\/p>\n
“Rich valuations in the equity and credit markets will be particularly vulnerable to price adjustment risk from macroeconomic surprises, policy uncertainty and geopolitical friction,” it said.<\/p>\n
“Equity prices and credit spreads are trading at their highest levels in a decade, and any negative surprise could trigger a significant revaluation,” the report noted \u2014 adding that the combination of historically high asset prices and relatively low market volatility is, “consistent with markets underpricing downside risks.”<\/p>\n
Divergence in monetary policy across different markets, along with economic disruptions, would also impact exchange rates, it noted.<\/p>\n","protected":false},"excerpt":{"rendered":"
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