One of the European Central Bank’s most senior officials has warned of a “disconnect” between benign financial market conditions and still significant uncertainty over economic policy under the new US administration.
“Market complacency is a concern. There is a disconnect”, Benoît Cœuré, executive board member of the ECB told Reuters on Thursday.
“There is still quite a lot of uncertainty about the future course of US economic policy, which is being resolved over time but only gradually as the new administration settles in. There is concern about the consequences of Brexit both for the UK and for the euro area”, said Mr Cœuré.
The prospect of major US corporate tax reform and stimulus spending had pushed equity markets to fresh records this year and driven volatility to near 26-year lows.
Still, the ‘Trump trade’ has shown signs of derailing this week as the new president has been plagued by controversy over a Russian intelligence sharing scandal and fears his tax plans will be pushed back. US stocks suffered their worst day since October yesterday.
With political risk in the eurozone also receding after the triumph of French centrist Emmanuel Macron, Mr Cœuré said risks to the bloc’s recovery still “come from outside”.
Investors should be prepared for a major asset repricing, he added:
They cannot work under the assumptions that the current, very benign market environment is going to stay forever.
It’s not about the policies themselves, which are decided by the US government and by the Fed and on which the ECB does not comment. It’s about market preparedness to cope with possible changes in policy.