Euro stocks are in danger of falling in 2017, with the IMF warning of a “toxic cocktail of bad policy and bad macroeconomic signals” in the wake of the Brexit vote.
As the world’s fourth-largest economy faces an economic crisis of its own, the global lender said that the global stock market was in danger from “excessive investor sentiment”, falling growth and “low commodity prices”.
A number of major indices in the Euro area, including the S&P 500, the FTSE 100 and the FSI 100, have plunged by over 30% this year.
In the past week, the Dow Jones Industrial Average fell over 600 points and the Nasdaq composite has fallen by more than 400 points.
The International Monetary Fund’s chief economist said the Brexit decision was “exacerbating” the problem.
“I don’t think this was a one-off.
I think it was the culmination of a very toxic cocktail of really bad policies and bad economic signals that we’ve been seeing for quite some time now,” economist Ricardo Reis said.”
This is an important reminder that we’re not just dealing with the effects of a one event, we’re dealing with a systemic problem and it’s going to take a long time to fix it.”
Read moreBrexit has fuelled a huge rally in the US and Europe, with stock markets rising in both markets this year, with investors hoping that Britain would be able to keep the UK in the EU and a “soft Brexit” could finally end the country’s membership of the bloc.
But with many of the world´s largest markets already in freefall, analysts warn that a return to “normalcy” in Europe could be years away.
“It is highly unlikely that a “Brexit” could happen in the foreseeable future,” the IMF said.
Read moreThe IMF warned that investors could be facing a “financial crisis” if they were to fail to pay up on their debts, adding that a loss of confidence in financial markets was likely.
“If financial markets continue to weaken, investors may not be able and may not want to invest in emerging markets and other high-risk sectors, leading to an oversupply of assets and an even more severe financial crisis,” the group said.
The IMF said the impact of Brexit could have an immediate negative impact on the financial sector.
“In the absence of an orderly and orderly transition to a new relationship with the EU, financial markets are likely to face substantial risk in the medium and long term,” the report said.
“It is not surprising, therefore, that the financial crisis of 2007-08 and its subsequent recession led to a significant increase in the share of global GDP in debt.”
The same risks also apply to emerging markets, including to their financial system and creditworthiness, and to financial markets as a whole.
“A lack of confidence, even for short periods of time, in the stability of financial markets, in particular in emerging economies, and a perception that financial markets and financial institutions are not functioning as they should, could have a profound impact on financial stability and the global economy.”
Read the full IMF report here