(Bloomberg) -- European Central Bank staff have been in contact with market participants over the current selloff in stocks to gauge if there is any risk to financial stability, according to euro-area officials familiar with the matter.
The latest communications are part of the ECB's regular interactions with financial institutions and the central bank isn't yet overly concerned by the global equity rout, the officials said, asking not to be identified because internal operations are confidential. The assumption is that it's simply a correction because valuations may have become overstretched.
Still, staff are watching for signs the downturn might enter a self-reinforcing spiral or spread from equities to bonds, the people said. One worry is that the selloff was triggered by strong U.S. economic data that led to expectations of faster interest-rate increases, evidence that financial markets are still underpinned by monetary support, one of the people said.
An ECB spokesman declined to comment.
The Stoxx Europe 600 Index slumped on Tuesday by the most since June 2016. Japan's Nikkei entered a correction and U.S. stocks fluctuated, with volatility hitting a two-year high. Some haven assets, including European bonds, traded higher.
The rout comes amid concern among investors over the potential return of inflation and higher interest rates that could erode company profits. It's a particularly sensitive time for the ECB, as policy makers try to judge whether they can end their 2.55 trillion-euro ($3.1 trillion) bond-buying program. While the 19-nation euro zone has just posted its strongest economic expansion in a decade, consumer-price growth remains muted.
Predictable Selloff
Still, while a sustained slump has the potential to undermine consumer and business sentiment, crimp borrowing and curtail global growth, St. Louis Fed President James Bullard said the slump was a widely expected correction.
“This is the most predicted selloff of all time because the markets have been up so much and they have had so many days in a row without meaningful down days,” Fed's Bullard told reporters on Tuesday. “Before there was a selloff, people said repeatedly some day this will sell off.”
Read more: What Global Policy Makers Are Saying About the Stock Slide
Among those who had warned about a possible reversal was ECB Executive Board member Benoit Coeure. A “reappraisal of investors' view about future risks to global inflation may cause a correction of global risk premia,” he said last week.
Other central banks, particularly in Asia, are also closely monitoring possible signs of contagion. Bank of Japan Governor Haruhiko Kuroda said the drop was affecting Japanese stocks, which were falling despite solid economic fundamentals at home and abroad. Officials at South Korea's central bank are on the lookout for potential repercussions in the foreign-exchange market.
The Bank of England declined to comment when asked if it is in contact with market participants over the rout. Governor Mark Carney may be quizzed on the topic on Thursday, after the BOE sets interest rates and presents updated economic forecasts.
--With assistance from Lucy Meakin
To contact the reporter on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net.
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow
©2018 Bloomberg L.P.
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