The Bank for International Settlements out with their Quarterly Review today

  • uncertainties for EM economies inc strong dollar and higher global bond yields loom large
  • jury is out on whether markets can make transition from post extra-ordinary crisis conditions
  • markets "breaking free" from dependence on central banks
  • may have to get used to bouts of extreme market volatility

Say the BIS:

"Global bond yields have continued to rise markedly in recent months. After core fixed income markets had plumbed new historical depths this summer, overall yields had jumped sharply by the end of November - in fact by a magnitude similar to that of the taper tantrum of May-September 2013. But despite record high duration risk, there were few signs of stress in credit markets as spreads remained tight and volatility was contained.

Initially supported by positive macroeconomic news globally, the rise in yields sharply accelerated after the US presidential election. Bond market reactions around election day resembled those surrounding the first election of Ronald Reagan in 1980. Buoyant US equity markets also echoed that distant event, suggesting that markets expected a boom in the United States and higher corporate profits on an anticipated shift towards more expansionary fiscal policy, lower taxes and laxer regulation. Accordingly, market odds of tighter monetary policy increased in the United States and the dollar strengthened.

The global rise in yields and the strengthening of the dollar weighed on the assets of emerging market economies (EMEs). Until early November, EMEs were unscathed by developments in advanced economies. Then, investor sentiment shifted markedly. Bond outflows and exchange rate depreciation in the post-election week were even larger than at the height of the taper tantrum."

Caudio Borio, head of the BIS Monetary and Economic Dept:

"We do not quite fully understand the cause of such unusual price moves, but as long as such moves remain self-contained and do not threaten market functioning or the soundness of financial institutions, they are not a source of much concern. We may need to get used to them.

It's as if market participants, for once, had taken the lead in anticipating and charting the future, breaking free from their dependence on central bank's every word and deed.

This suggests investors may finally be learning to stand on their own two feet after years of relying on central bank stimulus, signalling a potential paradigm shift for markets.

But the jury is still out and caution is in order. And make no mistake, bond yields are still unusually low from a long-term perspective."

Full report and some very useful reading here.

Enjoy the rest of your week-end one and all.