Post-COVID-19 Outlook: Systemic risks in financial markets to remain 'moderate'

Corporate bond spreads remain compressed; sectors recover at different speeds

  
Financial stock exchange market display screen board on the street. Image used for illustrative purpose.

Financial stock exchange market display screen board on the street. Image used for illustrative purpose.

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After an unprecedented year, financial markets will continue to be under pressure, but the risk of a systemic disruption will be moderate, according to a new analysis.

“Systemic risks in the financial markets [will] remain moderate over the next year, supported by accommodative policies in advanced economies,” Moody’s said on Monday.

The ratings agency noted that despite elevated asset prices, “credit spread and liquidity risk premia” have already both returned to around their pre-crisis levels. However, bond yields remain subdued, while a significant gap between the performance of financial markets and the real economy remains.

Uncertainties and panic initially gripped the financial markets last year after the new coronavirus quickly became a global pandemic. Prompt measures taken by governments and central banks helped mitigate the impact, with huge government fiscal packages providing relief to businesses.

Recovery at different speeds

“Many governments passed large fiscal packages to counter the economic impact of the pandemic. But the surge in government borrowing in 2020 was not met with a notable rise in borrowing costs,” Moody’s said in its report.

According to Ruosha Li, a Moody’s AVP-analyst and the report’s author, a number of equity markets already reached record highs by year-end 2020, thanks to central banks’ “accommodative monetary policies”. The positive trend was also propelled by a series of vaccine breakthroughs and optimism surrounding the economic recovery in 2021.

However, Li noted, different sectors continue to recover at different speeds, despite a broad-based recovery in the equity markets.

In the credit markets, corporate bond spreads remain compressed across all sectors after falling from their spike in March. These spreads have fallen at an unprecedented rate, Moody’s said, due to the policy support, returning to their long-term average in less than half the time it took during previous shocks.

“A significant gap between the performance of financial markets and the real economy remains. In particular, low interest rates and the unprecedented scale of asset purchase programmes have continued to support the markets,” said Moody’s.

(Reporting by Cleofe Maceda; editing by Mily Chakrabarty)

Cleofe.maceda@refinitiv.com

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