Recent sharp selloffs across global financial markets are probably the first of many, as investors adjust to a world of tighter monetary conditions and the threat of economic downturn, the Bank of International Settlements (BIS) said on Sunday, Reuters reports.
The “market tensions we saw during this quarter were not an isolated event,” Claudio Borio, head of the monetary and economic department at the BIS, was quoted as saying in his agency’s quarterly review.
Monetary “policy normalization was bound to be challenging especially in light of trade tensions and political uncertainty,” Borio added in the BIS report.
Among the challenges facing the global economy, Borio listed the possibility of rising inflation, the “dark cloud” of lower-rated US corporate debt in an overstretched market and weakness in the European banking sector.
The BIS is an umbrella group for the world’s central banks and its reports are seen as an indicator of the thinking that goes on behind the closed doors of its quarterly meetings.
The report comes following steep losses on global stock markets in recent weeks amid increasing fears for world and US economic growth as trade war noise escalated and central banks tightened policy or prepared to withdraw extraordinary crisis-era stimulus.
Recent weeks also saw short-dated US government bond yields briefly rise over medium-term rates, a phenomenon known as a “yield curve inversion”. A fairly reliable precursor of recessions, the inversion further spooked investors.
The BIS said, however, that studying the state of the financial cycle does a better job of flagging recession risks than the yield curve.
Borio, Mathias Drehmann and Dora Xia said their study had found that since the early-980s, downturns typically followed financial booms rather than significant monetary tightening.
But they did not apply their findings to today’s conditions to gauge the risk of a recession hitting in the years ahead, the report said.
– Contact us at [email protected]