Markets retreat and rebound: BIS Quarterly Review

Press release  | 
05 March 2019

Shifting macroeconomic prospects in major economies, and their implications for monetary policy, dominated market developments at the end of 2018 and in the early months of 2019.

Market commentary suggested that concerns that monetary policy would remain on a tightening course, despite a softening economic outlook, pushed US stock prices sharply lower in December. Investors grew increasingly uncertain of future corporate earnings growth. Financial markets found firmer footing in the new year after central banks reaffirmed that policy would respond to global economic risks.

Claudio Borio, Head of the BIS Monetary and Economic Department, commented: "Developments over the last couple of months conveyed a simple message. The very gradual and predictable monetary tightening process is on pause and has become less predictable, as inflation in advanced economies has shown few signs of flaring up, the prospects for economic activity have become more uncertain, and financial markets have turned out to be especially jittery. The narrow normalisation path is proving to be a winding one."

The March 2019 issue of the BIS Quarterly Review also:

  • Looks at the reliance of emerging market economies (EMEs) on foreign bank credit. The share of credit to EMEs from foreign banks has fallen since the Great Financial Crisis (GFC), reflecting an increase in credit from domestic banks and non-banks. Foreign banks still account for 15-20% of total credit on average. Concentration among creditor foreign banking systems has risen since the GFC, from an initially high level.
  • Examines market stress around the turn of the year and finds that market participants tried to avoid volatility by bringing forward adjustments as the end of 2018 approached. However, stress appeared in unexpected corners, partly reflecting year-end reporting incentives.
  • Analyses investment mandates and the risk of fire sales in the case of BBB bonds held by mutual funds. Sell-offs could arise if, at the height of a recession, enough issuers were downgraded from BBB to junk status in a short period of time. This would force mutual funds and, more broadly, other investors with investment grade mandates to offload bonds quickly.

Four special features analyse developments in markets and the global economy:

  • Andreas Schrimpf and Vladyslav Sushko (BIS)* provide an overview of risk-free rates that will form the backbone of the new benchmark regime and compare some of their key properties with interbank offered rates (IBORs). Finding a one-size-fits-all benchmark for every currency may be neither feasible nor desirable, so that several types of reference rate may ultimately coexist.

"A toolbox with a separate screwdriver and saw could be better suited to serve the financial system than a Swiss army knife," noted Hyun Song Shin, BIS Economic Adviser and Head of Research.

  • In a feature by Frederic Boissay, Carlos Cantú, Stijn Claessens and Alan Villegas (BIS),* the BIS unveils a public, online and interactive database of studies on the effects of financial regulations, called FRAME. The database reveals much variation in impact estimates, notably regarding the effects of bank capital and liquidity on loan growth. But, on average, more capital and liquidity tend to lead to more lending.
  • Stefan Avdjiev and Hyun Song Shin (BIS)* together with Mary Everett (Central Bank of Ireland)* follow the imprint of the ECB's expanded asset purchase programme on global bond and deposit flows. They find that non-bank financial institutions were the main foreign sellers of euro area bonds under the programme and track what happened to the sale proceeds.
  • Richhild Moessner and Phurichai Rungcharoenkitkul (BIS)* analyse the effects of the zero lower bound (ZLB) and forward guidance on how markets respond to news. They find that both forward guidance and the constraint on monetary policy imposed by the ZLB to varying degrees dampened the responsiveness of short-term interest rates to economic news after the crisis.

*   Signed articles reflect the views of the authors and not necessarily those of the BIS.