S.o The price recovery on the stock and bond markets after the Corona crash in the spring is gratifying for investors; the decoupling from the actual economic situation is causing the Bank for International Settlements (BIS) a headache. In its quarterly report published on Monday, the Basel-based “Bank of the Central Banks”, which manages foreign exchange reserves for central banks and serves as an economic think tank, attributes the development of the financial markets mainly to the expansionary monetary and fiscal policy.
“Given the many indicators, it is difficult not to see the clear discrepancy between the prices of risky assets and the economic outlook,” said BIS chief economist Claudio Borio. The latest price falls on the stock markets are an expression of the growing awareness among investors that market valuations and the economic situation are drifting apart.
At the annual general meeting on June 30, BIS General Director Agustín Carstens had already warned: “Monetary policy alone cannot be the engine of growth.” In view of the rising national debt in the wake of the crisis measures, the former central bank governor of Mexico considers it essential that fiscal policy remains on a long-term sustainable path through timely consolidation.
Risky assets such as stocks or corporate bonds have recently reached historic record highs, writes the BIS in its current quarterly report. American and Chinese stock indices in August exceeded their already high levels from the beginning of the year.
The risk premiums for corporate bonds (spreads) were lower than ever before, although the economic crisis as a result of the corona quarantine measures had significantly reduced credit quality.
In addition, the over-indebtedness of many companies has increased because they have used the environment of historically low interest rates to issue new bonds. BIS economists point to the many new bonds issued by investment grade companies that would have totaled $ 1.7 trillion by mid-August. This not only exceeded the level of 1.1 trillion dollars at the same time in 2019, but also the total volume of the previous year.
The same applies to bonds from financially weak companies (high yield bonds), which were able to sell 322 billion dollars in new titles by mid-August, 60 percent more than in the same period last year. According to the BIS, not all sectors benefited equally from equity price gains.
The winners included technology and pharmaceuticals stocks, while stocks from banks, real estate companies and energy providers could not have kept up. Here, investors have already taken the upcoming challenges into account in the valuations.
The rapid decline in American interest rates weighed on the dollar against the euro. The European common currency has also benefited from the moving closer together of the euro countries and their common corona policy.