Trade and monetary policy dominated market developments during the last quarter, with the prices of risky assets falling on escalating trade tensions and rebounding on monetary easing.
The prospect of higher trade tariffs reversed the early-year rally in equity and credit markets. Central banks' willingness to loosen monetary policy contributed to a recovery, but this was short-lived as a renewed focus on trade and weakening economic activity kindled risk aversion. Amid this uncertainty, yield curves in major economies inverted in August, which was seen in some quarters as signalling a growing risk of recession. However, other indicators painted a more mixed picture.
As interest rates fell, the amount of debt with negative yields reached record highs.
The September 2019 issue of the BIS Quarterly Review also:
- Looks at how evaluating the signals broadcast by yield curve inversion for US government bonds has been complicated by compressed term premia, and emphasises the importance of also assessing other indicators of recession risk.
- Compares subprime mortgage collateralised debt obligations (CDOs) before the crisis with collateralised loan obligations (CLOs) backed by leveraged loans today, highlighting similarities and differences in their market structure, and assessing the risks they pose for financial stability.
Four feature articles analyse developments in markets and the global economy:
- Bryan Hardy and Pablo García Luna (BIS) present a newly published breakdown of counterparty sectors in the BIS's international banking statistics. It shows that banks' exposures to non-bank financial institutions, especially those in financial centres, have increased in recent years.
- Tirupam Goel, Ulf Lewrick and Aakriti Mathur (BIS) show that the risk posed by global systemically important banks (G-SIBs) has diminished in line with the incentives set by the post-crisis regulatory framework. Higher capital ratios and a shift towards more stable sources of funding have strengthened G-SIBs' resilience. At the same time, their systemic importance relative to other banks has declined.
- Ingo Fender, Mike McMorrow, Vahe Sahakyan and Omar Zulaica (BIS) discuss how central bank reserve managers can incorporate environmental sustainability objectives into their portfolios. Green bonds' safety and risk-adjusted returns support their incorporation into reserve portfolios, although their accessibility and liquidity currently impose some constraints.
- Burcu Erik, Marco Lombardi, Dubravko Mihaljek and Hyun Song Shin (BIS) examine purchasing managers' indices (PMIs), timely indicators of economic activity. They find that changes in equity prices, corporate bond spreads and the US dollar help predict PMIs. The link with the dollar runs counter to what trade competitiveness predicts, suggesting a role for the dollar as an indicator of global financing conditions.
