Markets retreat and rebound: BIS quarterly review

05 March 2019

Shifting macroeconomic prospects in major economies, and their implications for monetary policy, dominated market developments at the end of 2018 and in the early months of 2019.

Market commentary suggested that concerns that monetary policy would remain on a tightening course, despite a softening economic outlook, pushed US stock prices sharply lower in December. Investors grew increasingly uncertain of future corporate earnings growth. Financial markets found firmer footing in the new year after central banks reaffirmed that policy would respond to global economic risks.

Claudio Borio, Head of the BIS Monetary and Economic Department, commented: "Developments over the last couple of months conveyed a simple message. The very gradual and predictable monetary tightening process is on pause and has become less predictable, as inflation in advanced economies has shown few signs of flaring up, the prospects for economic activity have become more uncertain, and financial markets have turned out to be especially jittery. The narrow normalisation path is proving to be a winding one."

The March 2019 issue of the BIS Quarterly Review also:

• Looks at the reliance of emerging market economies (EMEs) on foreign bank credit. The share of credit to EMEs from foreign banks has fallen since the Great Financial Crisis (GFC), reflecting an increase in credit from domestic banks and non-banks. Foreign banks still account for 15-20% of total credit on average. Concentration among creditor foreign banking systems has risen since the GFC, from an initially high level.
• Examines market stress around the turn of the year and finds that market participants tried to avoid volatility by bringing forward adjustments as the end of 2018 approached. However, stress appeared in unexpected corners, partly reflecting year-end reporting incentives.
• Analyses investment mandates and the risk of fire sales in the case of BBB bonds held by mutual funds. Sell-offs could arise if, at the height of a recession, enough issuers were downgraded from BBB to junk status in a short period of time. This would force mutual funds and, more broadly, other investors with investment grade mandates to offload bonds quickly.

Press release

Quarterly review

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