03.06.201301:33:44UTC+00Markets under a financial easing 'spell': BIS

Markets are under a “spell” of international financial easing that leaves valuations vulnerable to alterations in sentiment, the Bank for International Settlements warned Sunday.

The Bank for International Settlements, effectively a central bank for central banks, has long sounded the alarm over dovish policies pursued by the Federal Reserve, the Bank of England, the Bank of Japan and other central banks.

The Fed has been purchasing $85 billion a month of mortgage-backed and Treasury securities, though officials have suggested they may slow the buying rate in the autumn.

The Bank of Japan is aiming a 2% inflation rate through doubling the financial base and purchasing bonds and exchange-traded funds.

The BIS says markets are skyrocketing mostly because of these efforts, because expansionary financial policy lowers the discount rate at which future earnings are valued.

The BIS points out that even as advanced economy stock market indexes have benefited, commodity prices have fallen and rising market stocks have not gained as much. That suggests financial policy is giving these assets a support that the economic data on their own might not warrant.

The “ride to normality” as the economy recovers will be “bumpy,” says Stephen Cecchetti, head of the monetary and economic department of the BIS.

While “volatility per se is not necessarily bad,” it does create risks, notably to the interest-sensitive assets on the balance sheets of banks, investors and others, Cecchetti said.

“With the outstanding volume of government bonds greater than ever, interest rate risk — expressed as potential losses in relation to GDP — is at a record high in most advanced economies. And these losses will be spread across banks, households and industrial firms,” he says.

Separately, the BIS found there was a sharp, $467 billion reduction in cross-border interbank lending between the third and the fourth quarter of 2012, amid concerns over European finances.