The "daylight" between valuations in risk assets and economic prospects remains a concern despite improved business conditions and positive news on the development of a vaccine.
The Bank for International Settlements' latest quarterly review, covering the period Sept. 7-Nov. 30, said risk assets "received a fillip in early November from positive vaccine news and the U.S. election outcome," with valuations approaching — and in some cases surpassing — prepandemic levels. Optimism over business conditions and supportive policies also buoyed markets.
However, this positivity was in contrast with continued uncertainty in economic conditions. "Concerns about the daylight between valuations and the still uncertain economic prospects persisted," the review said.
The BIS also looked at the recent relationship between U.S. Treasuries and stock markets. It said Treasuries' use as a hedging tool against equity risk "has been called into question, as bond and equity markets have experienced simultaneous sell-offs in recent years."
The review also included six essays analyzing developments in markets and the global economy, covering tools for managing banking distress, the dollar exchange rate as an emerging markets equity risk factor, financial vulnerabilities driving firms to the exit, international banking amid COVID-19, changes in monetary policy operating procedures over the last decade, and retail payments in Latin America and the Caribbean.
