The Bank of International Settlements (BIS) on Sunday warned of a rocky path ahead given tightening monetary conditions and with international markets in flux amid fears of a global trade war.
New bouts of turbulence have hit US markets in the past few weeks while the European Central Bank (ECB) last week confirmed that it was withdrawing its US$2.9 trillion quantitative easing bond-buying program in January.
The ECB move comes despite fears of sagging eurozone growth and the Basle-based BIS, known as the central bank’s central bank, warned of “bumps” in the road that were “a reminder of the narrow path that central banks are treading ... in a generally challenging policy environment.”
In its quarterly review, the BIS identified “ongoing trade tensions and heightened political uncertainty in the euro area” as causes for concern.
“Investors appeared unnerved by poor forward visibility of results, against the background of trade tensions, weakening global conditions and the Federal Reserve’s determination to move forward with gradual policy normalization,” the report added.
The “market tensions we saw during this quarter were not an isolated event,” Claudio Borio, head of the monetary and economic department at the BIS, said by telephone.
The BIS said that disagreements on the Italian budget, the uncertainty of Brexit and US-China tensions were also undermining sentiment.
Against such a gloomy backdrop, a return to monetary normality was “bound to be challenging,” Borio said, adding that the “dark cloud” of lower-rated US corporate debt was a further worrying factor hanging over investors.
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