Mar­ket ‘par­a­digm shift’ may be un­der way: BIS

Kuwait Times - - BUSINESS -

Fi­nan­cial mar­kets have been re­mark­ably re­silient to ris­ing bond yields and sud­den shift in out­look fol­low­ing last month’s shock US elec­tion re­sult, but the sheer scale of un­cer­tain­ties ahead means the ad­just­ment will be “bumpy”, the BIS said yes­ter­day.

While the re­silience to re­cent mar­ket swings fol­low­ing the US elec­tion and Brexit vote have been wel­come, in­vestors should be braced for fur­ther bouts of ex­treme volatilty and “flash crash” episodes like the one that hit ster­ling in Oc­to­ber, the Bank for In­ter­na­tional Set­tle­ments said.

“We do not quite fully un­der­stand the cause of such un­usual price moves ... but as long as such moves re­main self-con­tained and do not threaten mar­ket func­tion­ing or the sound­ness of fi­nan­cial in­sti­tu­tions, they are not a source of much con­cern: we may need to get used to them,” said Clau­dio Bo­rio, Head of the Mon­e­tary and Eco­nomic Depart­ment at the BIS.

“It is as if mar­ket par­tic­i­pants, for once, had taken the lead in an­tic­i­pat­ing and charting the fu­ture, break­ing free from their de­pen­dence on cen­tral banks’ ev­ery word and deed,” Bo­rio said.

This sug­gests in­vestors may fi­nally be learn­ing to stand on their own two feet af­ter years of re­ly­ing on cen­tral bank stim­u­lus, sig­nal­ing a po­ten­tial “par­a­digm shift” for mar­kets, he said.

“But the jury is still out, and cau­tion is in or­der. And make no mis­take: bond yields are still un­usu­ally low from a long-term per­spec­tive,” Bo­rio said. The BIS, of­ten re­ferred to as the “cen­tral banks’ cen­tral bank”, acts as a fo­rum for the world’s ma­jor mon­e­tary au­thor­i­ties. Its com­men­taries on global mar­kets and eco­nom­ics give an in­sight into pol­i­cy­mak­ers’ think­ing.

Bond yields have risen sharply since the mid­dle of the year. The bench­mark 10-year US Trea­sury yield has jumped 100 ba­sis points since July’s multi-decade low, with a grow­ing num­ber of in­vestors say­ing the 35-year bull run in bonds is now over. That rise has come against the po­lit­i­cal shocks of Bri­tain’s vote in late June to leave the Euro­pean Union and Donald Trump’s elec­tion vic­tory last month.

The surge of 20 ba­sis points in US bond yields the day af­ter the elec­tion was the largest since the “taper tantrum” mar­ket sell-off in 2013, and greater than all but 1 per­cent of one-day moves in the last quar­ter cen­tury, the BIS said. Yet US stocks are chalk­ing up record highs, mar­ket volatil­ity is an­chored at his­toric lows and cor­po­rate spreads have re­mained rel­a­tively tight. Liq­uid­ity has been “ad­e­quate”, ac­cord­ing to the BIS.

This all points to in­vestors an­tic­i­pat­ing stronger growth re­sult­ing from eas­ier US fis­cal pol­icy, lower taxes and looser reg­u­la­tion, par­tic­u­larly in the fi­nan­cial sec­tor, the BIS said. Banks will gen­er­ally ben­e­fit from higher rates and a steeper yield curve, and the re­cent surge in US bank stocks is “a telling sign of a brighter per­ceived out­look,” the BIS said. But higher yields and a stronger dol­lar also pose risks, es­pe­cially to emerg­ing mar­kets, even though some EM eq­uity and credit mar­kets held up bet­ter than they did at the time of the taper tantrum in 2013.

The start­ing point for emerg­ing mar­kets wasn’t so se­vere as in­vestors had al­ready with­drawn “mas­sive” amounts from EM funds be­tween 2013 and 2015, while loans in re­cent years had gen­er­ally been taken out over long ma­tu­ri­ties and at fixed rates.

Still, nearly 10 per­cent of dol­lar-de­nom­i­nated cor­po­rate debt in EM comes due next year, mean­ing firms must ei­ther pay back $120 bil­lion or re­fi­nance it at a higher and ris­ing cost, ac­cord­ing to the BIS.

Dol­lar fund­ing costs and money mar­ket spreads rose sharply in the lat­est quar­ter as in­vestors ad­justed to new US money mar­ket rules that took ef­fect in Oc­to­ber. Short­term dol­lar fund­ing from money mar­ket funds shrank by some 70 per­cent. But un­like 2008 when widen­ing spreads tight­ened fi­nan­cial con­di­tions and tor­pe­doed banks’ cred­it­wor­thi­ness, this was a reg­u­la­tion-driven move that had “lim­ited” spillover ef­fects on broader fi­nan­cial mar­kets. Bor­row­ers sim­ply raised cash else­where, the BIS said. Mean­while, the BIS also said that new data show that banks in China are the 10th largest lenders in the in­ter­na­tional bank­ing mar­ket and banks in Rus­sia the 23rd largest.

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