The BIS released its Quarterly Review presenting an overview of recent developments in financial markets, before turning in more detail to highlights from the latest BIS data on international banking and financial market activity.
The review also contains five special feature articles:
- on the use of network methods to identify international banking centres;
- on international banking with the euro;
- on interpreting the growth in foreign exchange activity based on the BIS triennial survey;
- on the risk in carry trades with target currencies in the Asia-Pacific region; and
- on changing post-trading arrangements for OTC derivatives.
Overview: markets hit by renewed credit woes
Further deterioration in the US housing market and concerns about associated economic and financial risks continued to take centre stage during the period under review. Prices for risky assets had recovered into October, as earlier worries about systemic risk had eased, not least because of determined central bank action in the money markets. However, uncertainties about subprime and other credit market exposures remained, adding to more general concerns that US housing market woes would deepen and eventually contribute to broader economic weakness. With market participants refocusing on these risks and liquidity conditions in money markets remaining tense, sentiment worsened once again from mid-October.
Share prices fell sharply in major equity markets. The financial sector was particularly badly hit, following a string of multibillion dollar credit-related writedowns by banks. Adding to this, third quarter year-on-year corporate earnings growth was negative in the United States for the first time in several years.
Government bond yields in major industrialised economies fell as investors again fled to safety, but also as the result of an anticipated weakening of economic activity. Heightened expectations of monetary policy easing, in particular in the United States, added to the decline in yields. Such expectations, in combination with the sharp rise in oil prices, may have contributed to rising break-even inflation rates in a number of markets.
Highlights of international banking and financial market activity
In the international debt securities market, issuance retreated sharply during the turmoil in financial markets in the third quarter of 2007. Borrowing in euro-denominated bonds and notes was hit hardest, while the dollar and sterling segments slowed as well, although less appreciably. The decline in euro borrowing reflected weak issuance from French and German residents. The slowdown in borrowing was also evident in the emerging markets as issuance fell dramatically in emerging Asia and Europe. This may have stemmed from a retreat in risk appetite, since issuance of lower-rated bonds and notes in developed countries plummeted as well.
The turbulence in financial markets led to the busiest trading on record on the international derivatives exchanges. Activity was particularly strong in derivatives on short-term interest rates, perhaps because traders shifted some trading from the spot market or the OTC derivatives market onto exchanges. Rapid growth was also recorded in contracts on stock indices and on foreign exchange. Combined turnover in listed interest rate, currency and stock index derivatives rose by 27% to $681 trillion between July and September, after remaining stable in the previous quarter.
Press release
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International banking and financial market developments
Overview: markets hit by renewed credit woes, Full text
Highlights of international banking and financial market activity, Full text
Special features
International banking centres: a network perspective
Abstract, Full text
International banking with the euro
Abstract, Full text
What drives the growth in FX activity? Interpreting the 2007 triennial survey
Abstract, Full text
Risk in carry trades: a look at target currencies in Asia and the Pacific
Abstract, Full text
Changing post-trading arrangements for OTC derivatives
Abstract, Full text
Recent initiatives
Recent initiatives by the Basel-based committees and groups
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© Graham Bishop
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