December 7, 2014 / 11:13 AM / 5 years ago

Sudden market swings, dollar rise expose emerging market vulnerability: BIS

ZURICH (Reuters) - Sudden swings in financial markets recently suggest they are becoming more fragile and sensitive to unexpected events, the global organization of central banks said on Sunday, warning that a rising U.S. dollar could have a “profound impact” on emerging markets in particular.

Traffic flows in front of the Bank for International Settlements (BIS) in Basel December 5, 2013. Picture taken with long exposure. REUTERS/Arnd Wiegmann

MSCI’s all-country world stock index is hovering around multi-year highs after rebounding from sell-offs in August and October.

    The downturns were triggered by uncertainty over the global economic outlook and monetary policy, as well as geopolitical tensions, and the Bank for International Settlements (BIS) said the sharp and sudden dips pointed to frailty in the markets.

    “These abrupt market movements (in October) were even more pronounced than similar developments in August, when a sudden correction in global financial markets was quickly succeeded by renewed buoyant market conditions,” the BIS said.

    “This suggests that more than a quantum of fragility underlies the current elevated mood in financial markets,” it said in its quarterly review. “Global equity markets plummeted in early August and mid-October. Mid-October’s extreme intra-day price movements underscore how sensitive markets have become to even small surprises.”

    The comments followed the organization’s warning in September that financial asset prices were at “elevated” levels and market volatility remained “exceptionally subdued” thanks to ultra-loose monetary policies being implemented by central banks around the world.

Since then, the U.S. Federal Reserve has brought its monthly bond-purchase program to an expected end. However, Japan’s central bank has expanded its massive stimulus spending while China unexpectedly cut interest rates, adding to stimulus measures from the European Central Bank.

These divergent monetary policies, coupled with the dollar’s recent appreciation, could have a profound impact on the global economy, particularly in emerging markets where many companies have large dollar-denominated liabilities, the BIS said.

“It’s the warning that the rising dollar could bring more (emerging markets) trouble in its wake - as it did in the 1990s - that is going to challenge FX markets tomorrow morning while we’re all thinking about what the U.S. non-farm payroll data mean for Fed rate hike timing,” Societe Generale’s currency strategist Kit Juckes told clients in a note on Sunday.

Juckes was referring to the larger-than-expected 321,000 rise in U.S. jobs in November reported on Friday, data which sent the dollar to multi-year highs against the yen and euro.

Separately, the BIS report said that international banking activity expanded for the second quarter running between end-March and end-June.

    Cross-border claims of BIS reporting banks rose by $401 billion. The annual growth rate of cross-border claims rose to 1.2 percent in the year to end-June, the first move into positive territory since late 2011.

Editing by Pravin Char and Rosalind Russell

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