The financial markets are experiencing an uneasy calm ahead of expected U.S. interest hikes in almost a decade. The rate increases are set to take effect later this month.
Markets experiences uneasy calm ahead of Fed rate hikesEmerging markets have elicited restrained reaction to signals from the Federal Reserve, reactions that have so far been encouraging, according to Switzerland-based Bank for International Settlements. However, there are strong expectations that the markets will return to being volatile.
According to Claudio Borio, head of Bank of International Settlements Monetary and Economic Department, “The financial markets have been calm, but it is an uneasy calm.”
Borio added that it was not surprising that markets remained sensitive to the slightest of actions undertaken by central banks as interest rates in most parts of the world are constantly tittering at the edge.
Borio also observed that there was eminent friction between prevailing economic conditions and market reactions. However, this needs to be resolved because markets can only remain calm for so long.
The report by the Bank of International Settlements also assessed recent lending, debt issuance and investment trends. The report showed in the period between June and September, a time when fluctuations in the Chinese economy, a strong dollar and low commodity prices shocked global markets, issuance of debt in emerging economies declined, the lowest fall since the 2009 financial crisis.
In Turkish and Brazilian banks, net debt issuance was at -$2billion and -$1.6 billion respectively, while in China the figures declined from $10 billion down to $300 million.
Borio said, “Emerging economies are still experiencing financial vulnerabilities. Dollar-dominated debt has doubled since the start of 2009 to more than $3 trillion and it has not gone away.”
As the US dollar appreciates, it has caused balance sheets in emerging markets to weaken and exacerbated the financial vulnerabilities in emerging markets.