Further 20% fall in U.S. stocks ‘certainly possible’: IMF director

According to the director of money and capital markets of the International Monetary Fund, a change in investor sentiment could lead to a further 20% decline in US stock markets.

IMF research has found that rising interest rates and future earnings expectations are driving down company valuations in the current market downturn, Tobias Adrian told CNBC’s Geoff Cutmore at the 2022 Monetary Fund Annual Meetings. International and World Bank Group in Washington, DC

Sentiment and risk premia have held up “pretty well” so far, leading to an “orderly tightening”, he said on Tuesday.

Asked about a recent CNBC interview with Jamie Dimonin which the chief executive of JPMorgan said that S&P500 could easily drop a further 20%, Adrian said it was “definitely possible”.

The benchmark has fallen about 25% since the start of the year.

The US Federal Reserve raised its financing rate to 3%-3.25%, the highest since the start of 2008, in September as it tries to cool inflation from 8.3% year-on-year. The latest US inflation figures are due Thursday.

“I think what Jamie Dimon is referring to is that there could be a shift in sentiment as well. And that would, of course, trickle down to economic activity,” Adrian said.

“Now in terms of the 20% number, it’s definitely possible. It’s not our baseline, but it’s something that is possible.”

Adrian added that the IMF did not have a hard figure for its benchmark, but that was where financial conditions continued to tighten, economic activity slowed and markets continued to be under pressure.

Dimon: S&P could still fall by

Tuesday, the institution published its World Economic Outlook, in which it forecast global growth to slow to 2.7% next year, 0.2 percentage points lower than its July forecast.

He also said 2023 would look like a recession for millions around the world, with around a third of the global economy experiencing a contraction.

High crisis risks

Adrian told CNBC that despite recent volatility in areas such as British government bondsthe IMF’s baseline continued to be that global credit markets remain “orderly” and would not tip into a full-scale crisis of the magnitude of a “Lehman moment”.

But, he added, there are plenty of downside risks.

“[Financial stability risks] are very high. They are only higher in times of acute crisis, such as the 2008 crisis, the Covid 2020 crisis or the euro crisis,” he said.

“So yes, we are in a very, very stressed moment, hopefully we will avoid a systemic event. But the probability is certainly high at this stage.”

Banks have much more capital and liquidity than during the 2008 crisis, when the banking system caused a lot of acute stress, he noted – however, an adverse scenario in emerging markets would see 30% of bank assets undercapitalized countries and vulnerabilities in the non-banking financial system could spill over into the banking system, he warned.

Leave a Comment

Your email address will not be published. Required fields are marked *