Systemic risks in global financial markets have remained relatively contained over the past six months, despite increases in some areas, Moody's Investors Service said in a report today. More stable banking sector fundamentals have also been supportive of credit conditions over the past year.
The report, "Moody's Financial Monitor - Credit conditions remain favourable as growth and banking sectors stabilise", is available on www.moodys.com. Moody's subscribers can access the report using the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.
Moody's Financial Monitor provides Moody's views on developments in financial markets and the global banking system, and assesses systemic risks posed by potential asset bubbles, excessive leverage, market volatility and weak bank fundamentals.
"Financial conditions in global markets are more favourable than a year ago and are likely to remain so as global growth picks up and banking sector fundamentals remain stable," said Colin Ellis, Moody's Managing Director -- Credit Strategy and the report's co-author. "That said, there are potential downside risks from event-related volatility in financial markets tied to elevated asset prices, and banking sectors in Latin America and the Commonwealth of Independent States look relatively vulnerable."
Global economic activity has improved during 2017, with steady momentum reflected in a wide range of variables, including purchasing managers' indices, industrial production, global trade and financial flows. Moody's expects G20 economies to grow at an annual rate of slightly more than 3% in 2017 and 2018, higher than the 2.6% recorded in 2016.
Within financial markets, Moody's assessment is that some systemic risks, such as asset price and market liquidity risks, have increased in recent months. However, overall systemic risks look relatively contained, with none of the six systemic risks we monitor being assessed higher than 'medium'.
Equity prices have picked up recently, moving above their 10-year average relative to nominal GDP, while corporate bond spreads between investment grade and non-investment grade companies have settled at around 200-300 bassis points in the US and the euro area.
Exchange rate risk has declined as political uncertainty has faded, notably in Europe following recent elections. Policy uncertainty has also decline, but remains elevated, while market liquidity has tightened in euro area government bond markets.
While the banking sector's fundamentals are improving and problem loans have bottomed out in most regions, the past improvement in capitalization has lost some momentum. Banking systems with negative and stable outlooks have seen their profitability and efficiency positions improve over the past six months.
Weak banking systems are currently not experiencing elevated asset prices, leaving them less exposed to risks of asset bubbles. Countries in the south of the euro area, as well as Russia and Brazil, are among the weakest systems in terms of high banking sector risk, yet score in the bottom range of our asset price index.
Conversely, at the upper end of the asset pricing spectrum - and possibly at risk of developing detrimental asset price bubbles -- are countries such as Switzerland and Norway. However, these countries and others among the upper grouping of our asset price index have some of the most secure banking systems, as gauged by our stress tests.