(Bloomberg) -- The way financial markets recovered from turbulence in the aftermath of Britain voting to leave the European Union could be deceptive, the Bank for International Settlements warned.
Asset prices might be too high and markets may be susceptible to bouts of volatility, the Basel, Switzerland-based institution cautioned in its quarterly report released Sunday. Central banks’ supportive monetary policy together with global growth showing some signs of recovering helped restore investor confidence in markets, yet “questions about their underlying resilience remain,” the BIS said. Sliding bond yields across fixed-income markets and underwhelming performance by banks at a time where stock markets rallied are “highlighting the sense of dissonance.”
“There has been a distinctly mixed feel to the recent rally -- more stick than carrot, more push than pull, more frustration than joy,” Claudio Borio, head of the monetary and economic department at the BIS, said in a statement. “This explains the nagging question of whether market prices fully reflect the risks ahead. Doubts about valuations seem to have taken hold in recent days. Only time will tell.”
The amount of government bonds trading at negative yields surpassed $10 trillion within days after Brexit, according to the report. At the same time, low interest rates are squeezing bank profitability.
Adding to the risk of sudden market moves is the widespread use of electronic trading platforms and algorithms whose complexity and “often opaque trading strategies has raised concerns about potential implications for market stability in times of stress,” the BIS said.
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