- Markets rebounded in November as positive vaccine news and the US election outcome boosted sentiment, although concerns about the daylight between valuations and the economic outlook persisted.
- Government bond yields stayed unusually low supported by accommodative monetary policy, sustaining a search-for-yield environment.
- The relative performance of EME currencies partly reflects the structure of production in the respective economies.
According to the BIS Quarterly Review, risky assets received a fillip in early November from positive vaccine news and the US election outcome, approaching and, in some cases, surpassing pre-pandemic levels. Optimism about business conditions and continued policy support also fuelled markets' buoyancy.
At the same time, the Review reports that a divergence in the assessment of corporate vulnerabilities appeared to be emerging. On the one hand, credit spreads in advanced economies compressed further, approaching pre-pandemic lows. On the other, banks tightened lending standards throughout the review period. Investors' search for yield and the specifics of policy support appeared to underpin these contrasting developments.
A certain amount of daylight between risky asset valuations and economic prospects appears to persist. While markets have moved in the right direction in response to news about the vaccine, they are above or close to the levels that prevailed before the pandemic, when questions about overstretched valuations were already present.
Monetary policy has remained accommodative during this period, with central banks in major jurisdictions reiterating their commitment to act as necessary to support the economy during the fallout from the second Covid-19 wave. In other AEs and some emerging market economies (EMEs), central banks scaled up their asset purchases, while others cut policy rates.
EME currencies' strength partly reflected structural features of domestic production, with gains concentrated in economies focused on technology or more deeply involved in manufacturing global value chains rather than commodities.
The December 2020 issue of the BIS Quarterly Review also:
- Explores the role of changes in the supply of bonds available for investors in explaining the divergence between US and German10-year government bond yields.
- Examines the recent relationship between US Treasuries –traditionally seen as safe haven assets – and stock markets, noting that the bonds' hedging effectiveness has declined in recent years.
Six features analyse developments in markets and the global economy:
The BIS also publishes six features that analyse monetary and financial stability policy issues of international importance.
A better grasp of the historical experience with distress-mitigating policy tools, the US dollar as a risk factor and drivers of corporate solvency issues can help us prepare for the Covid-19 fallout.
Tools for managing banking distress: historical experience and lessons for today
- Frédéric Boissay, Stijn Claessens and Alan Villegas (BIS) analyse the effectiveness of policy tools for large-scale banking distress, noting that swifter and broader actions mitigate recessions, and that asset purchases and lending work well when banks have been underperforming or when distress follows abnormally large asset price increases.
The broad dollar exchange rate as an EME risk factor
- Boris Hofmann and Taejin Park (BIS) use data from 21 EMEs to explore how the appreciation of the US dollar can be a drag on real economic activity.
The financial vulnerabilities driving firms to the exit
- Ryan Banerjee and Enisse Kharroubi (BIS) investigate how firms' financial vulnerabilities can affect their survival, finding that high short-term debt and low earnings relative to interest expenses are the two most significant financial predictors that a firm will exit the market.
International banking amid Covid-19: resilience and drivers
- Bryan Hardy and Előd Takáts (BIS) find that international bank lending –both cross-border and local – has remained resilient in AEs and EMEs during the Covid-19 crisis, even though economic activity has declined more than during the Great Financial Crisis of 2007–09.
Retail payments in Latin America and the Caribbean: present and future
- Viviana Alfonso, Alexandre Tombini and Fabrizio Zampolli (BIS) analyse how innovations by central banks in retail payment services in Latin America and the Caribbean have met the challenges of limited access and high costs.
Changes in monetary policy operating procedures over the last decade: insights from a new database
- Adam Čáp, Mathias Drehmann and Andreas Schrimpf (BIS) introduce a new interactive database on central banks' monetary policy operating frameworks, and provide a short primer on these "nuts and bolts" of central banking.
