A ‘fundamental regime shift’ could be underway as investors rethink U.S. assets, ECB says


Luis de Guindos, vice president of the European Central Bank (ECB), at a rates decision news conference in Frankfurt, Germany, on Thursday, Jan. 30, 2025.

Alex Kraus/Bloomberg via Getty Images

The European Central Bank on Wednesday said a “fundamental regime change” could be underway in financial markets as investors appear to be reassessing how risky U.S. assets really are in the wake of trade tariffs.

In its latest Financial Stability Review, the central bank discussed the recent spike in market volatility off the back of global trade tensions driven by U.S. tariff policy.

Markets have been reacting sensitively to the frequent updates around trade and levies from the U.S. and its trading partners. Stocks first tumbled when U.S. President Donald Trump announced sweeping tariffs, before rebounding when he declared a temporary 90-day pause on duties.

“During the turmoil, market functioning – which can be thought of as the ability to trade financial assets quickly without moving prices inordinately – in euro area financial markets held up well,” the ECB noted. “This was despite some atypical shifts away from some traditional safe havens like US Treasuries and the US dollar.”

While this could have been linked to technical factors, the ECB said, it might have also had broader triggers.

“These moves might also have reflected perceptions of a more fundamental regime change, with investors seeming to reassess the riskiness of US assets, possibly leading to broader shifts in global capital flows,” the ECB noted. “This would have potentially far-reaching consequences for the global financial system.”

ECB Vice President Luis de Guindos on Wednesday suggested to CNBC that there was a risk of a market correction down the line. Two key things to currently consider are elevated valuations and strong uncertainty, he told CNBC’s Annette Weisbach.

“Markets are very benign with respect to this scenario. They believe that, you know, growth is going to be low, but we are not going to enter into a recession, inflation is going to decline, and monetary policy will follow suit,” de Guindos explained.

Risks could still emerge, and various issues such as what could happen regarding trade and fiscal policies and regulation from the U.S. government are unclear, he said.

“And these elements give rise to volatility. I think that volatility is, perhaps, you know, the consequence of these two elements …, valuations and uncertainty.”

In its report, the central bank pointed out that it had previously warned about “vulnerabilities posed by high valuations that are not backed by fundamentals,” saying that “this source of risk has now partly materialised.”

Trump’s reciprocal tariff announcement was the trigger for this, the ECB said.

Uncertainty the ‘name of the game’



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