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The Bank of International Settlements on Sunday warned of a rocky path ahead given tightening monetary conditions and with international markets in flux amid fears of a global trade war.
New bouts of turbulence have hit US markets in recent weeks while the European Central Bank last week confirmed it was withdrawing its $2.9 trillion quantitative easing bond-buying programme in January.
The ECB move comes despite fears of sagging eurozone growth and the Basle-based BIS, known as the central bank’s central bank, warned of ‘bumps’ in the road which were ‘a reminder of the narrow path that central banks are treading… in a generally challenging policy environment.’
In its quarterly review the BIS identified ‘ongoing trade tensions and heightened political uncertainty in the euro area’ as causes for concern.
‘Investors appeared unnerved by poor forward visibility of results, against the background of trade tensions, weakening global conditions and the Federal Reserve’s determination to move forward with gradual policy normalisation,’ the report added.
The ‘market tensions we saw during this quarter were not an isolated event’, Claudio Borio, head of the monetary and economic department at the BIS said in a conference call.
The BIS said that in Europe disagreements between Rome and Brussels on the Italian budget plus the uncertainty of Brexit were also undermining sentiment.
Furthermore, ‘as December started, stock markets remained unsettled in the midst of uncertainty around trade tensions between the United States and China’.
Borio concluded that against such a gloomy backdrop a return to monetary normality was ‘bound to be challenging,’ adding the ‘dark cloud’ of lower-rated US corporate debt was a further worrying factor hanging over investors.