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Market rebound since Brexit may not reflect risks: BIS

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Financial markets recovered far more rapidly than expected following Britain's vote to leave the EU, the Bank of International Settlements said Sunday, warning that the rally might be ignoring significant risks ahead.

[ZURICH] Financial markets recovered far more rapidly than expected following Britain's vote to leave the EU, the Bank of International Settlements said Sunday, warning that the rally might be ignoring significant risks ahead.

During the two days of trading following the so-called Brexit vote on June 23, most major stock indexes shed more than five per cent, while the broadest London stock exchange index plunged 15 per cent, and the British pound lost 10 per cent of its value against other major currencies.

But despite the initial dramatic reaction, markets appear to have rapidly overcome the shock, largely due to central banks whose willingness to intervene had a calming influence, said the Basel-based BIS, considered the central bank for central banks.

"The speed of the recovery took many by surprise, given the political and economic uncertainty that the vote had triggered," Claudio Borio, the head of the BIS monetary and economic department, told journalists in a teleconference.

BIS pointed out that global growth was "showing moderate but persistent signs of strengthening", while "investors' risk appetite seemed to return." "Volatility in financial markets subsided, commodity prices edged higher, corporate credit spreads narrowed, stock markets rallied and portfolio flows to emerging market economies resumed," it said.

But Borio said that dissonance in some markets indicated all might not be as rosy as it seemed.

Bond yields had continued to decline, he said, while yield curves had flattened - "typically a tell-tale sign of a low growth outlook." In fact, the overall stock of sovereign debt was providing record negative yields of well above US$10 trillion in the weeks following the Brexit vote, he said.

BIS also noted concern over the capacity of banks to make profits in an era of persistent low and negative interest rates.

The prospect of longterm low rates had meanwhile fuelled a search for yield in stock markets resulting in "ebullience", and "highlighting the sense of dissonance," it said.

Borio said there had been "a distinctly mixed feel to the recent rally," with "more stick than carrot, more push than pull, more frustration than joy." "This explains the nagging question of whether market prices fully reflect the risks ahead," he said.

"It is becoming increasingly evident that central banks have been overburdened for far too long."

AFP