Escalating geopolitical risk may cause a market correction

Financial markets “believe that we are in for a soft landing, they believe that geopolitical risks will not escalate, and therefore the risk premiums for both bonds and stocks are very compressed,” European Central Bank (ECB) Vice President Luis de Guindos told the US CNBC economic news on Wednesday 11/22/2023. Any questioning of this “could lead to a significant correction in market prices,” Mr Luis de Guindos added. However, the current investment sentiment is still more optimistic than current macroeconomic data suggests, and the price correction of financial market investment instruments may be even greater.

Markets may not be able to fully appreciate the risks arising from geopolitics and the economic outlook, and from this point of view the European Central Bank (ECB) is watching this as a potential threat to financial stability, said on Wednesday 22/11/2023 Mr. Luis de Guindos, more the President of the ECB. “So in case we have a negative surprise in terms of the development of the economy, in terms of the development of inflation, in terms of any escalation of geopolitical risks, I think this could lead to a significant correction of market prices,” said Mr. ECB Vice President. This is one of the main elements that we believe can now cause volatility in the financial environment,” added Mr. Luis de Guindos. The European Central Bank (ECB) expects low growth in the euro area of 1% but no recession in 2024, which according to Mr de Guindos is now “the basis for everyone”. However, the economy of the eurozone region fell by 0.1 percent in the third quarter of this year 2023.

Currently, in connection with this, the exchange value of the single European currency euro (EUR) against the US dollar (USD) fluctuated during the European Wednesday afternoon on November 22, 2023, approximately at 15:51 CET, at a mutual exchange rate of USD 1.088 per EUR with the EUR down by -0.303% against the USD for the day so far. According to the analysts of brokerage companies, this current drop in the exchange rate of EUR against the USD is precisely caused by fears that the ECB’s outlook is more wishful thinking than economic reality and that the eurozone will end up in an economic cycle of recession at the beginning of next year 2024. This mutual exchange rate was achieved in a situation where the exchange value of USD according to the dollar index DXY (US Dollar Currency Index) reached a point level of 104.01 USD points with a daily growth of + 0.43% of the point value according to this index, which compares the value of the USD to six other major world currencies.

However, risks to financial stability remain “elevated” as attention is now focused on the knock-on effect of tight financial and credit conditions on borrowers and a correction in property markets, the ECB’s “Financial Stability Review” said. “There are always negative surprises… with regard to inflation, the development has been very positive, from 10.6% to the current level, which is below 3%, and we expect this process of disinflation to continue over time. However, due to the benchmark, we will have some increase in inflation in the coming months,” Mr de Guindos said. According to him, another negative surprise could be the delayed transfer of higher rates to the real economy, the growth of wages, productivity and oil prices, Mr. de Guindos added. According to analysts of brokerage companies and financial strategists of the financial market, it can be assumed that in the short-term investment horizon, the mutual exchange rate of the euro against the US dollar will range from USD 1.05 to USD 1.10 per EUR.