Monetary tightening could skim frothy markets

2017 ◽  
Keyword(s):  
Financial Market ◽  
Bond Markets ◽  
German Government ◽  
Government Bonds ◽  
Content Type ◽  
Bank For International Settlements ◽  
Quarterly Review ◽  
Asset Classes ◽  
Market Valuations ◽  
Government Coalition

Subject Risk assets. Significance The Bank for International Settlements (BIS) warned of frothy financial-market valuations in its quarterly review on December 3. Overvaluation in several asset classes, including US equities and benchmark government bonds, in combination with monetary-stimulus withdrawal, increases the scope for a correction. Impacts Investors will continue to seek yield. Robust European growth will strenghten the euro against the dollar despite worries over the progress of German government coalition talks. Investors are worried about equity valuations, but a sustained sell-off is unlikely to occur without a sharp repricing in bond markets.

Italy election is unlikely to yield a stable coalition

2018 ◽  
Keyword(s):  
Financial Market ◽  
Market Risk ◽  
Bond Markets ◽  
Content Type ◽  
Stable Coalition ◽  
Market Instability ◽  
Financial Market Risk

Significance The electorate is deeply divided in ways that make compromise between parties extremely difficult. Unless the centre-right overcomes its divisions, another election seems likely very soon. Impacts Electoral deadlock could alarm currency and bond markets. If the M5S and League become the largest parties overall and on the centre-right respectively, there will be a risk of market instability. Financial market risk will probably materialise if efforts to build a centre-right coalition fail. If there is deadlock but the PD and Forza Italia underwrite a caretaker, markets may react with equanimity (though voters will not).

The ECB will set the speed of global credit tightening

2018 ◽  
Keyword(s):  
Financial Market ◽  
Euro Area ◽  
Market Volatility ◽  
Government Bonds ◽  
Content Type ◽  
Bank Of Japan ◽  
Global Growth

Significance The ECB's plan could tip the scales towards tighter credit conditions globally. However, there are concerns about global growth -- particularly in the euro-area -- and government bonds are proving extremely sensitive to hawkish policy, fuelling financial market volatility. Impacts The VIX index of anticipated US equities volatility is back near a record low, but volatility may rise and remain higher than recent years. Fed rate hikes and US growth outpacing the euro-area will strengthen the dollar although the euro briefly rose on the news of ECB tapering. The ECB trails the Fed by some years in policy tightening and forming a plan for unwinding QE; this divergence will also boost the dollar. The Bank of Japan is buying vast quantities of government bonds and has no plans to remove stimulus as inflation is far below the 2% target. Investors are appreciating and trusting Fed Chair Jay Powell's attempts to speak plainly and less formulaically than predecessor Yellen.

Financial market buoyancy is fragile amid rising risks

2020 ◽  
Keyword(s):  
Financial Market ◽  
Emerging Market ◽  
Equity Markets ◽  
Equity Fund ◽  
Government Bonds ◽  
Content Type ◽  
Financial Conditions ◽  
Forward Price ◽  
Growth Prospects ◽  
Global Growth

Subject Financial market momentum. Significance Global bond and equity markets continue to rally after making their largest annual gains since 2010 last year. Markets are brushing off a plethora of risks, from the escalation in tensions between Tehran and Washington to concerns about weak global growth, particularly in Europe. While valuations are becoming dangerously stretched -- the forward price-to-earnings ratio of the benchmark S&P 500 index is at the highest since 2011 -- the absence of a credible catalyst for a sharp sell-off is helping to underpin positive sentiment. Financial conditions remain exceptionally loose. Impacts Demand for government bonds is building momentum and the ten-year US treasury yield is just 40 basis points above its all-time low of 2017. Emerging-market bond and equity fund inflows have momentum and while several risks could curb this, a sustained reversal is unlikely. The Shanghai stock market has lost 5% since Wuhan’s coronavirus outbreak spread beyond China on January 13; further falls are likely. Despite low market volatility, government debt markets are much more pessimistic than equity markets about global growth prospects.

Yen surge to question global monetary easing's effects

2016 ◽  
Keyword(s):  
Interest Rates ◽  
Central Banks ◽  
Recent Improvement ◽  
German Government ◽  
Monetary Policies ◽  
Government Bonds ◽  
Content Type ◽  
Negative Interest Rates ◽  
The Us ◽  
Fiscal Support

Significance Despite aggressive easing by both the Bank of Japan (BoJ) and the ECB, including negative interest rates, the lowering of expectations over the scale and pace of rate hikes by the US Federal Reserve (Fed) has negated their attempts to weaken their currencies and thus boost export-driven growth. This is heightening concern that ultra-loose monetary policies have passed the point where they can revive growth and inflation. Impacts Despite the recent improvement due to the oil price rebound since mid-February, sentiment towards EM currencies will remain fragile. The still strong demand for 'safe-haven' assets, such as German government bonds and gold, implies investors will remain cautious. Negative deposit rates will further undermine banks' earnings, amid persistent concerns about capital levels. Central banks will reach the limits of their capacity to promote growth without fiscal support from governments.

Bond markets worry about higher rates under Trump

2016 ◽  
Keyword(s):  
Emerging Market ◽  
Inflation Expectations ◽  
Bond Markets ◽  
Fiscal Stimulus ◽  
Government Bonds ◽  
Risky Assets ◽  
Content Type ◽  
Growth Prospects ◽  
Severe Deterioration ◽  
Stimulus Package

Significance Equity markets have risen in anticipation of a fiscal stimulus package which would boost growth prospects. In contrast, demand and prices for government bonds, which were already under strain due to rising inflation expectations, have fallen due to fears of aggressive interest rate tightening to combat a debt-fuelled inflation surge. A sustained bond sell-off -- particularly one accompanied by a sharp rise in inflation -- could lead to a severe deterioration in sentiment towards 'risky assets'. Impacts Investors will see Trump's victory as a shift from ultra-loose monetary policy towards a greater reliance on fiscal stimulus. Stock market enthusiasm for tax and spending ideas could evaporate if these plans are not implemented or do not boost growth as expected. Copper had its best week for five years as Trump's stimulus plans are expected to boost demand and prices for industrial metals. The rouble was less affected by the election than other major emerging market currencies on hopes that US-Russian relations will improve.

Fed tightening deepens monetary policy rifts worldwide

2017 ◽  
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Oil Prices ◽  
Inflation Expectations ◽  
Bond Markets ◽  
Quantitative Easing ◽  
Government Bonds ◽  
Content Type ◽  
Political Risks ◽  
Bank Of England

Subject US tightening continued this month despite lower inflation expectations. Significance Monetary policy rifts have deepened since the decision by the Federal Reserve (Fed) on June 14 to raise interest rates for the second time this year despite inflation easing and oil prices falling below 45 dollars per barrel. Growing discord between central banks and bond markets has spread to the Bank of England (BoE), where three of the eight committee members disagreed with the June 15 decision to keep rates on hold despite inflation spiking to its highest since June 2013. The ECB and the Bank of Japan (BoJ) are also under pressure to set out plans to wind down their quantitative easing (QE) programmes. Impacts ‘Reflation trading’ continues to unwind; the world stock of negative-yielding government bonds has surged to nearly 10 trillion dollars. US equity markets are hovering near records despite a plethora of vulnerabilities, including lower oil prices and rising political risks. Emerging markets (EM) inflows continue to surge, but higher US rates may force EMs to raise rates before they are ready, hitting activity. The divergence between rising US rates and ultra-loose ECB and BoJ policy will cushion the dollar, protecting it from rising US risks.

US election fuels currency volatility

2016 ◽  
Keyword(s):  
Focal Point ◽  
Emerging Market ◽  
European Monetary ◽  
German Government ◽  
Government Bonds ◽  
Content Type ◽  
The Us ◽  
Outstanding Debt ◽  
Japanese Yen ◽  
European Monetary Policy

Significance The peso has lost a further 6.3% against the dollar since September 6 despite the decision by the US Federal Reserve on September 21 to keep its benchmark rate on hold, underpinning a rally in emerging market assets. A victory for Trump would weigh heavily on the dollar if investors pile into haven assets such as the Japanese yen and German government bonds. Impacts At nearly 30% of total outstanding debt, negative-yielding government bonds will increase demand for higher-yielding emerging market assets. Credibility and efficacy of Japanese and European monetary policy in stabilising markets will be a focal point for investor anxiety. Oil prices are still struggling to rally following a proposal by OPEC members to cut production.

Italy could be heading for a deeper recession

2020 ◽  
Keyword(s):  
Euro Area ◽  
Yield Spread ◽  
German Government ◽  
Government Bonds ◽  
Content Type ◽  
Borrowing Costs ◽  
The Imf

Subject Italy's economy. Significance According to the forecasting firm Ref Ricerche, Italy’s economy could contract by as much as 3% in the first half of 2020 following the outbreak of COVID-19. The yield spread between Italian and German government bonds has widened considerably, raising fears of another crisis for Italian banks, as many of them hold substantial amounts of government bonds. Moreover, even when the COVID-19 crisis starts to abate, demand could take a while to pick up, while it will also be difficult to encourage concerned investors to buy Italian bonds. Impacts Italy is likely to need several fiscal packages to deal with COVID-19; this would increase borrowing costs and worry investors. Absent a speedy recovery, Italy will probably need bailout funding from the euro-area and potentially the IMF. A lack of EU solidarity with Italy, which has already been evident, will play into the hands of Matteo Salvini’s League party.

Near-term financial market virus fears will be strong

2020 ◽  
Keyword(s):  
Financial Market ◽  
Debt Financing ◽  
High Yield ◽  
Government Bonds ◽  
Content Type ◽  
The Third ◽  
Global Recession ◽  
Near Term ◽  
Equity Index ◽  
High Chance

Significance More than 80,000 cases have been confirmed in China, and almost 10,000 cases in 68 other countries across six continents. The Morgan Stanley Capital International (MSCI) benchmark world equity index has plunged by more than 10% since February 19. Many investors fled to government bonds, driving the benchmark US ten-year treasury yield to a record low of 1.1%. Heightening investors’ fears, China’s official survey of its manufacturing purchasing managers' index (PMI) fell to a record low in February. Impacts Markets are almost pricing in a global recession but if the outbreak ends by April-June, there is a high chance that this will be avoided. US high-yield debt saw the third-largest dollar outflows ever in the last week of February; firms will struggle to access debt financing. If the infection rate falls as spring takes hold and temperatures rise in the Northern Hemisphere, this will help curb the outbreak. A long correction may be due as stock markets have risen for twelve years, but the length of this drop is highly uncertain. Goldman Sachs and JP Morgan have cut their forecasts for US firms' profit growth this year towards zero; more downgrades could follow.

scholarly journals Impact of COVID‐19 pandemic on risk transmission between googling investor’s sentiment, the Chinese stock and bond markets

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Taicir Mezghani ◽  
Mouna Boujelbéne ◽  
Mariam Elbayar
Keyword(s):  
Financial Market ◽  
Negative Impact ◽  
Spillover Effect ◽  
Chinese Economy ◽  
Bond Markets ◽  
Content Type ◽  
Daily Data ◽  
Study Results ◽  
Network Connectedness ◽  
Portfolio Managers

PurposeThe main objective of this paper is to investigate whether the investors' behavior under optimistic (pessimistic) conditions has an impact on risk transmission between the Chinese stock and bond markets and the sector indices mainly during the COVID-19 pandemic.Design/methodology/approachThis study uses a new measure of the investor's sentiment based on Google trend to construct a Chinese investor's sentiment index and a quantile causal approach to examine the causal relationship between googling investor's sentiment and the Chinese stock and bond markets as well as the sector indices. On the other hand, the network connectedness is used to estimate the spillover effect on the investor's sentiment and index returns. To check the robustness of the study results, the authors employed the Chinese VIX, as another measure of the investor's sentiment using daily data from May 2019 to December 2020.FindingsIn fact, the authors found a dual causality between the investor's sentiment and the financial market indices in optimistic or pessimistic situations, which indicates that positive and negative financial market returns may have an effect on the Chinese investor's sentiment. In addition, the results indicated that a pessimistic investor's sentiment has a negative impact on the banking, healthcare and utility sectors. In fact, the study results provide a significant peak of connectivity between the investor's sentiment, the stock market and the sector indices during the 2015–2016 and 2019–2020 turmoil periods that coincide respectively with the 2015 recession of the Chinese economy and the COVID-19 pandemic.Originality/valueThis finding suggests that the Chinese googling investor's sentiment is considered as a prominent channel of shock spillovers during the coronavirus crisis, which confirms the behavioral contagion. This study also identifies the contribution of a particular interest for portfolio managers and investors, which helps them to accordingly design their portfolio strategy.

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