BIS warns of gap opening between markets and Covid-19 reality

The announcement from Bank for International Settlements illustrates a globally suffocating situation as the financial consequences continue to look bleak

There is growing “daylight” between stock markets and other risky financial market asset classes and the reality of a global economy sapped by Covid-19, the Bank for International Settlements (BIS) said in its recent quarterly report.

“Based on a broad set of indicators, it is hard not to see a certain amount of daylight between risky asset prices and economic prospects,” Claudio Borio, Head of the BIS Monetary and Economic Department, said.

“We don’t really know exactly how the tensions are going to be resolved. There is quite a lot of uncertainty about how the virus will evolve and that will have big implications for financial markets and policy in general,” Borio added.

Global stock markets have risen more than 50% since plunging in February and March and bond market tensions have also receded considerably, despite the brutal slump the global economy is facing this year.

Borio added that the withdrawal of accommodation was “not for today for tomorrow or even for the day after tomorrow,” but would need to be phased out at some point.

For now, the most difficult phase of the Covid crisis is still ahead. “We are transitioning from the liquidity phase to the solvency phase.”

“In the solvency phase the real challenge is to distinguish between viable and non-viable firms that given the uncertainty about future demand patterns is not straightforward.” There is also the “big” debt crisis question he said, as countries have ramped their spending to try and support their economies.

“This is very much a policy challenge going forward,” Borio said.