The Bank of England's deputy governor for financial stability, Sarah Breeden, has warned that record-high global stock markets are not reflective of the underlying risks in the global economy and are likely to fall. In an interview with the BBC, Breeden expressed concerns that macroeconomic risks are not fully priced into equity markets, citing private credit markets, highly valued artificial intelligence stocks, and other risky valuations.
Market Adjustments Expected
Breeden stated, "There's a lot of risk out there and yet asset prices are at all-time highs. We expect there will be an adjustment at some point." This comes as the US stock market hit a record high earlier this week, with investors shrugging off fears that the energy shock from the Iran war could hurt the global economy and drive up inflation. Japan's Nikkei 225 index also ended at a record closing high, boosted by a rally in technology stocks after Intel beat forecasts.
UK Market Performance
Britain's FTSE 100 index is currently about 5% below its record high reached in late February, just before the Iran war began. Concerns about private credit, which involves potentially risky loans funded by investors, have been growing. The Bank warned at the end of March that valuations were particularly stretched for US technology companies focused on AI, and that investor sentiment regarding risky credit markets had deteriorated even before the Middle East conflict.
Private Credit Crunch Risk
Breeden highlighted the Bank's worry about a "private credit crunch, rather than a banking-driven credit crunch." She elaborated, "The thing that really keeps me awake at night is the likelihood of a number of risks crystallising at the same time – a major macroeconomic shock, confidence in private credit goes, AI and other risky valuations readjust – what happens in that environment and are we prepared for it?"
Impact on the Economy
Breeden added, "What we are watching for is: how might those prices fall? Will there be a sharp adjustment downwards? And if there is such an adjustment, how will that affect the economy? I'm not saying it will happen today, tomorrow, in 12 months' time. It's ensuring that if it happens the system is resilient." On Friday, the FTSE 100 fell by nearly 0.5% after Breeden's interview was published, amid a wider market drop as traders worried about no breakthrough in the Iran war.
Reactions from Analysts
Simon French, chief economist at Panmure Liberum, noted that the warning came in a week when the UK government pushed British savers to invest in financial markets, which he said "might be seen as suboptimal." Russ Mould, investment director at AJ Bell, suggested that Breeden's comments might have contributed to the FTSE 100's decline, saying, "It's unusual for a Bank of England official to explicitly warn about a potential stock market pullback, and the comment might have contributed to some of the FTSE 100's decline on Friday. Breeden wasn't simply referring to the Middle East events – she also referenced concerns around a private credit crunch, high equity valuations and AI."
