The world’s financial markets have finally given in to all-out turmoil after a period of relative calm. The Bank of International Settlements has warned that the markets are now facing a “gathering storm” which has been on the horizon for quite some time.
The bank has released its most recent quarterly report, which will be scrutinised by investors from all over the world. In its report the Bank of International Settlements, which is often referred to as the central bank of central banks, said that many investors are now worried that world governments are starting to run out of options with which to fight the chaos on the markets.
Claudio Borio, the head of the BIS, stated that the “uneasy calm” that had been seen in recent months was starting to give way to a “gathering storm”.
He went on:
“The tension between the markets’ tranquillity and the underlying economic vulnerabilities had to be resolved at some point. In the recent quarter, we may have been witnessing the beginning of its resolution,”
“We may not be seeing isolated bolts from the blue, but the signs of a gathering storm that has been building for a long time,” he added.
Asian markets continued to regain some of the losses that they underwent in January but the report warned that governments may not be able to do anything if another crisis were to hit.
The report read:
“Underlying some of the turbulence was market participants’ growing concern over the dwindling options for policy support in the face of the weakening growth outlook,” the report said. “With fiscal space tight and structural policies largely dormant, central bank measures were seen to be approaching their limits.”
“The latest turbulence has hammered home the message that central banks have been overburdened for far too long post-crisis,”
“Market participants have taken notice. And their confidence in central banks’ healing powers has — probably for the first time — been faltering. Policymakers, too, would do well to take notice.”
Mr Borio looked into the big market disturbances over the past three months, from the slowdown in China to the interest rate rise that was carried out by the US Federal Reserve.
Speaking about what he called the “second phase of turbulence” in the previous quarter, Borio explained that the global markets were displaying signs of fear over the health of banks around the world. They were also troubled by the surprise decision of the Bank of Japan to drop interest rates in negative territory.
“If negative policy rates do not feed into lending rates for households and firms, they largely lose their rationale,” the study said.
“On the other hand, if negative policy rates are transmitted to lending rates for firms and households, then there will be knock-on effects on bank profitability unless negative rates are also imposed on deposits, raising questions as to the stability of the retail deposit base.”
He went on to say that the continued weakness of oil prices had an adverse on the state of global markets.
Borio went on to say that “debt is what helps us understand apparently unrelated developments”.
“Against the backdrop of a long-term, crisis-exacerbated decline in productivity growth, the stock of global debt has continued to rise and the room for policy manoeuvre has continued to narrow,” he continued.
Debt in the private sector has risen mainly in emerging markets whilst public sector debt has risen more evenly.
He went on to say that debt provided a “hint” on why oil prices have continued to perform so weakly because “highly indebted oil-producing firms come under pressure to keep the spigots open to meet their service burdens”.