IMF head says financial reforms are necessary to avoid the next big crisis

Financial reforms are needed to avoid the next big crisis, the head of the International Monetary Fund has warned, though the recent sharp swings on the markets are not in themselves a cause for alarm, she said.

As rattled investors await a key US inflation report due on Wednesday, IMF managing director Christine Lagarde said she was "reasonably optimistic" about the strength of the global economy.

"But we cannot sit back and wait for growth to continue as normal," she said, speaking at a conference on global business and social trends in Dubai on Sunday. "I'm ringing not the alarm signal, but the strong encouragement and warning signal."

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?”

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Wild fluctuations

Stock markets have been hit by wild fluctuations in February, with the US benchmark S&P 500 tumbling 5.2 per cent last week, its biggest weekly percentage drop since January 2016. European shares suffered a similar drop, while the Iseq fell 4.1 per cent last week.

Amid the global selloff, the Dublin market has lost 6.2 per cent in the year to date, while the Iseq’s closing level on Friday of 6,599.67 is also 9 per cent lower than its January 23rd high.

Although Wall Street eventually finished Friday’s session with gains rather than losses, the uncertain mood on the day did little to calm investors’ nerves after a week of volatility fuelled by worries about rising interest rates.

The jitters have spread to other assets, with measures of market unrest moving higher in junk bonds, government securities and emerging-market equities.

This turbulence followed a period of market exuberance that saw the S&P 500 record its best start to the year since 1999. In January, Jeremy Grantham, the co-founder of Boston-based asset management firm GMO, said stocks were entering a "melt-up" phase after a very long stretch of gains.

Global growth

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

Wednesday’s consumer price index data for the US economy will be followed by a producer price index the next day. If both come in higher than investors’ anticipate, markets may succumb to fresh selloffs and swings. If the figures are below consensus expectations, equities may rally.

US consumer prices rose 2.1 per cent year-on-year in December and the index is forecast to stay around that pace this month.

The recent selloffs were in large part sparked by the February 2nd monthly US employment report, which showed the largest year-on-year increase in average hourly earnings since June 2009.

The jump in wages pushed yields on the benchmark 10-year US Treasury note closer to the 3 per cent mark last seen four years ago, denting the attractiveness of equities, and unnerving investors fearful that inflation will force the Federal Reserve, the US's central bank, to increase interest rates at a faster pace than is currently priced into the market. – Additional reporting: Reuters