The European Central Bank (ECB) has raised concerns that financial markets may be overly optimistic, despite a backdrop of persistent geopolitical tensions and trade related uncertainties. In its latest Financial Stability Review, the ECB highlighted a range of vulnerabilities that could threaten economic resilience. The report pointed to a mismatch between buoyant credit and equity markets and the broader economic outlook, which remains clouded by risks such as escalating trade disputes, sluggish growth, and potential disappointments in monetary policy expectations.
“Equity prices remain elevated and credit spreads appear misaligned with actual credit risk,” noted ECB Vice-President Luis de Guindos in the report’s foreword.
The ECB emphasized that trade policy uncertainty poses a significant threat to economic performance. It estimated that a notable rise in trade uncertainty could reduce median GDP growth forecasts by 0.15 percentage points within a year.
The central bank also warned that such uncertainty could have a pronounced impact on the financial sector, citing data showing that banks’ share prices could fall by over 10% within six months, while their bond market borrowing costs could rise by 7 basis points. Additional risks outlined in the review include the growing threat of cyberattacks, the concentration of investments in illiquid private markets, and the increasing—though still limited—interconnection between cryptocurrencies and traditional financial systems.