- Bank of International Settlements warns of ‘violent’ market crash
- Low levels of market volatility persist despite conflicts and crises across the world
- Investors buying assets on the misguided presumption of a level of liquidity
- Share prices continue to plummet as investor confidence decreases
A potentially ‘violent’ stock market crash could be on the horizon as financial markets become dangerously stretched, a think-tank has warned.
The Bank of International Settlements said that suspiciously low levels of volatility in the markets seen this year suggest a lack of liquidity that could trip up investors who assume they can dispense of assets when a sell-off begins.
The speech came as the FTSE 100 index suffered another day of losses, dropping 2.8 per cent and mirroring falls across Europe: Greece’s stock market trading was down 9 per cent at one point today.
Guy Debelle of BIS said global investors were buying assets on the misguided presumption of liquidity that does not exist and that in a possible sell-off, volatility and price movements ‘will be exacerbated by the reduced capacity and inventory of market makers’.
Despite a string of potentially destabilising issues – including heightened tensions in the Middle East and Eastern Europe, uncertainty about the turning point in US monetary policy and increased concerns over China’s economy – the BIS observed that volatility in fixed income, equity and foreign exchange markets has fallen to ‘historically low levels’.
Speaking in Sydney, Debble, who is also an executive at Australia’s Reserve Bank, said: ‘While there is more forward guidance from central banks in place than in the past, investors do not have to believe it’.
He added, ‘I find it somewhat surprising that the market (in aggregate at least) is willing to accept the central banks at their word and not think so much for themselves’.
Citing the US bond crash of 1994, Debelle warned that exits in the present bonds market could be even more violent in future with ‘a fair chance that volatility will feed on itself’.
Problems with subsequent sell-offs are also compounded as interest rates remain at zero across much of the industrial world. Debelle said, ‘That is a point we haven’t started from before. There are undoubtedly positions out there which are dependent on (close to) zero funding costs. When funding costs are no longer close to zero, these positions will blow up’.