Volatility stirs, markets unshaken

Following a prolonged period of unusual tranquillity, financial markets saw an uptick in volatility in early August. Risk appetite took a dent, as escalating geopolitical tensions added to renewed concerns about the recovery. Equity prices fell, especially in Europe, high-yield credit spreads widened significantly, and yields of safe haven assets such as short-maturity German bunds fell into negative territory. Markets, however, quickly rode out the turbulence. By early September, they had already recovered their losses, as worries over geopolitical tensions were surpassed by investors' anticipation of further monetary stimulus in the euro area.

 

After the spell of volatility in early August, the search for yield - a dominant theme in financial markets since mid-2012 - was again in full swing. Volatility fell back to exceptional lows across virtually all asset classes, and risk premia remained compressed. By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility.

 

Highlights of the BIS international statistics

The contraction in overall international banking activity which began in late 2011 went into reverse in the first quarter of 2014. The cross-border claims of BIS reporting banks rose by $580 billion between end-December 2013 and end-March 2014. While not enough to offset the preceding quarterly declines, the first quarter increase caused the year-on-year decline in cross-border claims to slow from 4.0% as of end-2013 to 2.0% as of end-March 2014.

 

Asset managers in emerging market economies

The turbulence in emerging market economies following the Federal Reserve's tapering announcements in mid-2013 was a reminder that the activity of large asset managers can significantly affect small and illiquid asset markets in those economies. Data from EPFR Global show that the assets under management of dedicated emerging market funds have grown, from a pre-Lehman peak of $900 billion in October 2007 to $1.4 trillion in May 2014. Funds covered by the EPFR database now hold about 8.5% of total emerging market equities and bonds outstanding.

 

Risks related to EME corporate balance sheets: the role of leverage and currency mismatch

Corporates in many EMEs have taken advantage of unusually easy global financial conditions to ramp up their overseas borrowing and leverage. Issuance data based on issuer nationality (including issuance by the overseas subsidiaries of the corporations headquartered in a given country) indicate that private sector borrowers (other than banks) in major EMEs issued international debt securities worth almost $375 billion in 2009-12, more than double the amount issued in the four years before the crisis.

 

International bank lending during the taper tantrum: the role of emerging market fundamentals

Cross-border bank lending to emerging markets slowed considerably during the taper tantrum in mid-2013. Stefan Avdjiev and Előd Takáts use newly available data to explain the drivers of the slowdown. They find that, although the initial tapering shock stemmed from advanced economies, EME-specific factors explain most of the variation in the deceleration across lender-borrower pairs. While factors connected with both the lender banking system and the borrower EMEs are statistically significant, the latter group is responsible for roughly 70% of the explained variation. In particular, the authors identify the current account balance and the share of cross-border bank lending denominated in US dollars as significant drivers. One lender banking system variable, the change in the average bank CDS spread during the taper tantrum, accounts for the remaining 30% of explained variation.

 

Residential property price statistics across the globe

House prices are key indicators of financial stability, as property booms often lead to systemic crises. But, despite their importance, residential property data are not easily available in a format that makes them easily comparable across borders. To remedy this gap, the BIS collects data on house prices for 55 countries. For 18 of these countries, series are available that go back as far as the 1970s.

 

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