KEY POINTS:
FRANKFURT - Financial markets are bullish about the world economy and see a soft landing for the United States, the Bank for International Settlements (BIS) said.
Markets have largely recovered from a broad-based sell-off in May and June and investors have a high appetite for risk, the Basel-based bank said in its quarterly survey of international banking and financial market developments.
"While at times sending mixed signals, markets appeared to be largely optimistic about global economic prospects and the likelihood of a soft landing for the US economy," it said about the past three months' trading activity.
A US$6 billion ($8.86 billion) loss by a hedge fund, political instability in Thailand and Hungary, and sharp currency movements had all failed to have a big impact on asset prices, according to the report.
The BIS acts as a forum for central bankers from around the world to meet and discuss policy and regulatory issues.
Government bond yields in the United States, euro zone and Japan bottomed out in September and have since been range-bound, driven in part by reduced inflation expectations.
The BIS said: "The sharp fall in oil prices in September and October seemed to play a key role for developments in break-even inflation rates in major markets," and the effect was most noted for the US and shorter maturities.
Share prices moved independently of bonds, the report said.
In the euro zone and Japan, price moves mirrored changes in economic growth, while in the US, traders took consolation from the limited effect that the broader economic slowdown was having on corporate profits. Takeover activity also supported prices.
Corporate debt markets were less buoyant than equity markets, though spreads against sovereign debt still tightened.
Junk bonds outperformed investment grade debt, perhaps due to concern that more credit-worthy companies were increasingly vulnerable to mergers or private equity buyouts, which lead to reduced credit quality.
In emerging markets, debt spreads narrowed and share prices rose, driven more by US trends than regional factors like Thailand's coup.
The report said: "In an environment where considerable uncertainty seemed to remain about the direction of economic growth, inflation, and monetary policy - in particular in the United States - prices of options ... implied very low levels of near-term volatility.
"A strong appetite for risk among investors is likely to have played a role in the pricing of financial assets and associated derivatives."
- REUTERS
