Moody’s Investors Service released its latest report on European and Middle Eastern market on Wednesday. The report predicted an unstable financial market for the region, given the escalating trade tensions and political scepticism. The financial agency highlight that despite volatility in the market, the overall market risks remain moderate.
Trade war with the US, emerged in May, led to slump in the stock market, until the central banks relaxed interest rates, to pump up the market in June. Moody’s report mentioned that as per certain traditional metrics, stock prices are still high including price-to-earning ratios, but these could be due to lower real interest rates. It made the region wary of the bubble created by high private investments, which could eventually cause a dip in the credit market.
“We expect that ongoing trade tensions and political uncertainty will keep equity markets volatile. Equity prices still look elevated on some traditional metrics, but these may understate the impact of structurally lower real interest rates,” said Colin Ellis, Moody’s managing director for credit strategy and co-author of the report.
The bond market has been affected with the political highs and lows, with more stable bonds concentrated in the US market. But the overall attitude of the market is far more calmer than the stock market.
Ellis added, “Policy rate expectations in the US Treasury bond market have been swiftly revised since the beginning of the year. The market is now pricing in more cuts in the US policy rate than Federal Open Market Committee (FOMC) members suggested in June. While a disconnect between the bond market and FOMC projections has occurred before, the resolution of this misalignment could generate bond market volatility.”