Tuesday 19 June 2018

IMF's Lagarde says market swings are not worrying her

IMF boss Christine Lagarde Photo: Reuters
IMF boss Christine Lagarde Photo: Reuters

Tom Arnold

Sharp swings in global financial markets in the past few days are not worrying since economic growth is strong but reforms are still needed to avert future crises, the managing director of the International Monetary Fund (IMF) has said.

Christine Lagarde, speaking at a conference on global business and social trends in Dubai, said economies were also supported by plenty of financing available.

"I'm reasonably optimistic because of the landscape we have at the moment. But we cannot sit back and wait for growth to continue as normal," she said in her first public comments on market movements since the latest round of turmoil at the end of last week.

"I'm ringing not the alarm signal, but the strong encouragement and warning signal."

Global stock markets were hit by wild fluctuations, with the US benchmark S&P 500 SPX tumbling 5.2pc last week, its biggest weekly percentage drop since January 2016. The volatility was fuelled by investor worries about rising interest rates and potential inflation.

Ms Lagarde repeated an IMF forecast, originally issued last month, that the global economy would growth 3.9pc this year and at the same pace in 2019, which she said was a good backdrop for needed reforms.

She did not give details of the reforms she wanted to see beyond saying authorities needed to move to regulation of activities, not entities.

"We need to anticipate where the next crisis will be. Will it be shadow banking? Will it be cryptocurrencies?" she said.

The inflation bogeyman has reared its ugly head in recent days, and sent US stock investors racing for the hills.

This week, coming off one of the most volatile stretches in years, two important readings on US inflation could help determine whether the stock market begins to settle or if another bout of volatility is in store. If the January US consumer price index, due on Wednesday from the US labour department, and the producer price index the next day come in higher than the market anticipates, brace for more selling and gyrations for stocks.

US consumer prices rose 2.1pc year-on-year in December and are forecast to stay around that pace this month.

"If we get a hot CPI print it will insert additional uncertainty, but if we get a quiet, below-consensus print, you may see yields down and equities rally," said Jason Ware, chief investment officer and chief economist at Albion Financial Group, in Salt Lake City, Utah.

The equity market has become highly sensitive to inflation this month. A sell-off in US stocks last week was in large part sparked by the February 2 monthly US employment report, which showed the largest year-on-year increase in average hourly earnings since June 2009. Recent US tax cuts that may spur economic growth, the prospect of more government borrowing to fund a widening fiscal deficit, and rising wages, have all pushed up benchmark US treasury yields to near four-year highs.

"This is how we started, go back to Friday and this is exactly where we were," said Art Hogan, chief market strategist at B Riley FBR, in New York. (Reuters)


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