CNBC: IMF Warns Disconnect in Financial Markets Risks a Correction in Asset Prices

Article by Silvia Amaro in CNBC financial

The International Monetary Fund has warned that the ongoing disconnect between financial markets and the real economy could lead to a correction in asset prices. 

In recent months, equity markets have rallied despite troubling real-world events. The world is grappling with the coronavirus health emergency that has taken the lives of almost 500,000 people, according to John Hopkins University data, and threatens to cause an unprecedented economic crisis. In addition, there is social unrest in many advanced economies as citizens demand a more equal society, which could hit investor confidence.

Recent data indicates a deeper-than-expected downturn, the Fund added, but markets appear unfazed: the S&P 500 enjoyed its largest 50-day rally in history in early June.

“This disconnect between markets and the real economy raises the risk of another correction in risk asset prices should investor risk appetite fade, posing a threat to the recovery,” the IMF said Thursday in its updated Global Financial Stability report.

“According to IMF staff models, the difference between market prices and fundamental valuations is near historic highs across most major advanced economy equity and bond markets," the fund said.

Asset and fund managers

There is a risk that “nonbank” financial companies — such as asset and fund managers — could also face shocks in the event of a broad wave of insolvencies. The IMF warned that these businesses could even ...

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