A "sense of complacency" is permeating markets as investors, betting on continued accommodative monetary policy, are stretching asset prices, risking a sudden market correction, the International Monetary Fund (IMF) warned on Wednesday.
The rollout of Covid-19 vaccines has boosted expectations of a global recovery and helped prompt a surge in asset prices, despite rising infections and persistent uncertainties surrounding the economic outlook, the world's largest multilateral lender said in its Global Financial Stability Report.
Stretched asset valuations in some areas are largely contingent on government lifelines. Policymakers should be prepared for the risk of a market correction, which could exacerbate financial vulnerabilities that have so far remained at bay, such as rising corporate debt and weakness in nonbank financial institutions, the IMF said.
Even so, policymakers should continue to provide support until a sustainable economic recovery takes hold, as vaccine underdelivery may jeopardize the global recovery, it said.
"We do certainly detect stretched valuations in some sectors and some asset classes - in credit, and some riskier segments of credit, in many bond markets and of course in equity markets - it is an environment that is stretched to some degree, but easy financial conditions are an intended outcome of the easing of monetary policy," Tobias Adrian, director of the IMF's Monetary and Capital Markets Department, said in an interview. The report also cautioned that an uneven distribution of coronavirus vaccines could further exacerbate global financial instability.
Advanced nations have pre-purchased large amounts of vaccine while developing nations "lag significantly" in obtaining them, setting the stage for stronger economies to lift restrictions sooner than others.
If central banks in recovering Western economies start to normalize monetary policy, that could imperil capital flows in frontier and developing markets, and raise the cost of external financing, the IMF warned.