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​BIS: Market Rallies, Fueled by Monetary Easing, Belie Danger Signs

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Dan Weil | FlashRatings | Sunday, September 18, 2016 8:03 PM EDT
Easing by central banks around the world has ignited powerful rallies by stock and bond markets over the past seven years. But major dangers lurk behind the upward moves, says Claudio Borio, head of the Bank for International Settlements’ monetary and economic department

"There has been a distinctly mixed feel to the recent rally–more stick than carrot, more push than pull, more frustration than joy. This explains the nagging question of whether market prices fully reflect the risks ahead," Borio said in the bank’s latest quarterly review

The S&P 500 Index has more than tripled since March 2009, and the 10-year Treasury yield has dropped about 120 basis points to 1.70 percent.

"The apparent dissonance between record low bond yields, and sharply higher stock prices with subdued volatility cast a pall over such valuations,” Borio said. 

The global economy and financial markets are too reliant on monetary accommodation, he maintains. “It is becoming increasingly evident that central banks have been overburdened for far too long. A more balanced policy mix is essential to bring the global economy into a more robust, balanced and sustainable expansion.” 

Some analysts are concerned that easy central bank policy is creating bubbles in financial markets and that markets may crash if interest rates rise quickly.

“There is the risk of financial instability down the road” because of all the easing, Mohamed El-Erian, chief economic adviser at Allianz, told Bloomberg Radio. “That, I think, is the strongest argument for trying to slowly normalize rates, because otherwise you contribute to excessive risk taking.”