The latest version of the Bank for International Settlements’ quarterly review indicates that global financial markets are now dealing with the consequences of economic downturn.

The review, which covers the period from the end of May to late August, finds that global financial markets “adjusted to growing signs of a broad-based cyclical deterioration” over the past few months.

“While markets continued to display signs of fragility, worries about the economic outlook and related uncertainties gained prominence, weighing on valuations across asset classes,” it notes.

Credit markets came under renewed pressure over the period, as spreads widened to reflect the implications of the ongoing cyclical adjustment for loss expectations and financial sector balance sheets, it says, “This was despite retreating oil and commodity prices, government action in support of the U.S. housing market and continued recapitalisation efforts by banks and other financial firms.”

“Equity markets reflected similar concerns, as valuations adjusted to reflect disappointing earnings data, including in the financial and other cyclical sectors. Against this background, pressures in interbank money markets persisted, prompting further central bank action to ease financial sector access to funding,” the report notes.



In the international debt markets, borrowing recovered sharply in the second quarter despite the continued turmoil, the BIS observes. Net issuance of bonds and notes increased to US$1,071 billion, up substantially from US$371 billion in the first quarter and recovering almost to the level recorded just before the recent turmoil began, it reports. The increase came primarily from the euro-denominated bond segment, where net issuance of US$464 billion was more than four times the level of the previous quarter. Mortgage-backed bond issuance also rose markedly, particularly in the UK.

Trading on the international derivatives exchanges retreated in the second quarter, the review says. Total turnover based on notional amounts decreased from the high of US$692 trillion recorded in the first quarter to US$600 trillion. “Most of the contraction came from derivatives on short-term interest rates, but turnover also declined in derivatives on long-term interest rates and stock indices. By contrast, turnover in derivatives on foreign exchange was robust, up over the previous quarter’s level and increasing by as much as 44% year on year. Turnover in derivatives on commodities, measured only in terms of the numbers of contracts, dropped, although year-on-year growth remained quite high at 37%,” it says.