Download GFSR Market Update

GFSR Market Update
Last Updated: January 29, 2008
The GFSR Market Update (Formerly known as the Financial Market Update) is
an online bulletin that covers developments in both mature and emerging
markets. It is published twice a year -- in the summer and winter -- and
complements the Global Financial Stability Report.
January, 2008: Global financial market conditions have worsened since the publication of
the October 2007 Global Financial Stability Report as the fallout from the subprime mortgage
crisis widens. What began as a test of the structured credit markets and the associated
funding needs has reached a new phase where credit concerns now extend beyond the
subprime sector.
July, 2007 (pdf file 290kb): Financial stability risks have evolved largely as foreseen in the
April 2007 Global Financial Stability Report, with a rise in credit and market risks but
continued strong macroeconomic performance underpinning overall financial stability.
December, 2006 (pdf file 465kb): The September 2006 Global Financial Stability Report
presented a baseline scenario of solid global growth, contained inflation, and continued
financial stability. However, it reported that risks were tilted to the downside. Growth could
slow more sharply if the U.S. housing market were to weaken rapidly; inflation could spike,
possibly reflecting rising energy prices; and a disorderly unwind of global imbalances
remained a threat. Developments since then have been broadly in line with the baseline
scenario. Market sentiment has gravitated toward a central scenario for a benign slowdown
which keeps inflationary pressures contained. But downside risks remain and there have been
changes in underlying financial conditions that warrant continued vigilance.
June, 2006: Since the release of the April 2006 GFSR, global financial markets have
experienced increased volatility and a sharp correction in the price of riskier assets, in
particular mature market equities and emerging market assets. Inflationary pressures have
resulted in a synchronized tightening of global monetary policies, and perceived downside
risks for growth, triggering selling in global equity markets and an unwinding of leveraged
carry-trade positions. The fall in investor risk appetite is a normal and healthy market
adjustment that should better position markets to deal with the pressures at this stage in the
global financial and economic cycle. For emerging markets, the sell-off reflects a rise in risk
premia, but not a reassessment of emerging market fundamentals. Emerging market equities
and currencies with significant valuation gains and local fixed-income markets where foreign
investors concentrated positions corrected the most. But external debt markets show little
concern about the possibility of a sovereign credit distress event. Nevertheless, policymakers
in both mature and emerging markets face renewed challenges in ensuring balanced global
growth and financial stability.
December, 2005 (pdf file 521kb): Since the release of the September 2005 Global Financial
Stability Report, financial conditions in mature and emerging markets have remained
favorable, supported by expectations for sustained and broadening global growth, still
abundant liquidity, and a continuing investor search for yield. Nevertheless, risks to financial
stability remain, especially as interest rate and credit cycles turn and global liquidity is
withdrawn. Those emerging markets with structural vulnerabilities could be stressed. In
mature markets, markets for leveraged credit instruments could act to amplify reaction to
specific credit events, while sub-prime segments of the mortgage markets, particularly in the
United States, may be exposed by a fall in housing prices. Global imbalances remain a risk
that could lead to disorderly adjustment of financial asset prices even though this remains a
low probability event given the robustness of capital flows into the United States.
June,
2005 (pdf
file
491kb): Financial
markets
have
produced
some
unexpected
developments so far in 2005. The dollar has appreciated despite a growing U.S. current
account deficit, and long-term interest rates have fallen despite increases in short-term policy
rates. The decline in long-term yields reflects more moderate expectations for growth and
inflation, as well as a shift in long-term investors' preferences towards fixed-income assets.
With credit spreads in corporate and emerging debt markets at low levels, the search for
yield is increasingly providing incentives for financial market participants to move out the
credit spectrum towards riskier assets, and to try to enhance returns through use of complex
financial instruments such as credit derivatives.
November, 2004 (pdf file 612kb): Low yields and low volatility have been the hallmarks of
major financial markets throughout much of the year. This combination has encouraged
investors to take risk, especially in the credit markets, leading to low credit spreads and a
very receptive environment for new emerging market bond issuance. However, the
combination of low short-term interest rates and low bond market volatility has encouraged
leveraged positions in the credit markets, raising the risk that credit spreads have been
unduly compressed. Moreover, increased concerns over the heavy reliance of the United
States on continued capital inflows to finance its large external current account deficit have
resulted in a decline of the dollar.
June, 2004 (pdf file 372kb): Changing expectations for the pace and timing of the U.S.
tightening cycle have had a profound effect on global investor sentiment, positioning, asset
prices, and credit spreads both this year and last. Since early 2004, the prospect of higher
short-term interest rates has made investors more cautious and triggered deleveraging
across a wide range of markets. This process has been orderly without posing a threat to
financial stability or financial intermediaries.
May, 2003 (pdf file 367kb): Ample liquidity in main financial centers and improved market
confidence spur rally in corporate and emerging market bonds through mid-May. Concerns
about U.S. dollar overshooting and uncertain prospects for global growth pose risks.
Emerging bond market has benefited from a global quest for yield that has compressed
spreads to quite low levels. Primary issuance, however, has lagged earlier years. Rebound in
global growth needed to sustain recent improvements in credit quality and financial strength.
November, 2003 (pdf file 411kb): Encouraged by abundant global liquidity, strong
economic growth, low inflation, and the improving credit quality of borrowers in both mature
and emerging markets, investors have increasingly favored riskier assets. As a result, credit
spreads in mature and emerging markets have narrowed, the cost of default protection has
fallen, global equity markets have rallied strongly since their trough in March, and equity
market volatility is low. While stronger global growth and low risk-free interest rates are
providing a positive external environment for emerging markets, continued inflows may push
valuations to levels not fully justified by fundamentals.