Warning on lengthy market turbulence

Financial markets need to gird for a lengthy spell of turbulence as more of the world’s top central banks begin shutting down stimulus programmes and raising interest rates, the Bank for International Settlements said in its latest report.

A decade after the collapse of Lehman Brothers ignited the global banking crisis, the Switzerlandbased central bank umbrella group likened this year’s market volatility to the reaction of a patient coming off strong medicine.

There could be more turbulence ahead with US rates likely to keep rising, trade war worries escalating, the European Central Bank about to end its money printing programme and troubled emerging markets having to jack up interest rates.

“Policymakers and markets should brace themselves for a lengthy and eventful convalescence,” the head of the BIS’ Monetary and Economic Department, Claudio Borio, warned.

The sell-off in emerging markets since the end of January has already matched the one seen five years ago during the ‘taper tantrum’ when investors first freaked out about life without US Federal Reserve stimulus.

That proved a short-term bump for markets, but the BIS sees this episode as having a slower burning fuse, the length of which will partially hinge on whether recessions start to hit as some economists now fear.

Central banks are expected to tread carefully. The imminent end to the ECB’s €2.5 trillion (Dh10.83 trillion) bond buying plan will be cushioned as it recycles the profits for years, while the Bank of Japan lags even further behind in the process.