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Published On: Mon, Sep 22nd, 2014

G-20 warns of growing financial market risks

G-20 finance bosses and central bankers lay the focus on possible soaring of financial market risks due to low interest rates, uneven economic growth and increased dependence on monetary stimulus.

G-20 meeting attendants focus on possible soaring of market risks due to low interest rates, uneven economic growth and increased dependence on stimulus.

According to G-20 finance bosses and central bankers, low interest rates could easily increase market risks, with major economies counting on monetary stimulus as a means of propping uneven growth. They are aware of the hazards as the ambience of low interest rates and volatility of asset prices is present.

The global economy has been patchy since the G-20 Sydney meeting in February. The US and UK economies have picked up and so have stock markets, but deflation risk seriously threatens Europe. Added are concerns over the difficult attainability of China’s economic growth target of 7.5 percent for 2014.

The recent mounting of geopolitical risks and the grim outlook for the larger economies worldwide have not marred much US, Europe and Asia’s major financial markets, as monetary stimulus was supplied by the Fed, ECB and BOJ.

The S&P 500 Index, in the middle of its longest quarterly gains period since 1998, rose to a record high last week. The Stoxx Europe 600 Index rose in 5 out of the 6 last weeks. This month, the MSCI World Index reflecting global developed-market equities hit the highest since December 2009. The extra return demanded by investors for holding corporate bonds is nearing its lowest since 2007, at 109 basis points on September 19, following the June seven-year low of 105.

Last week the Chicago Board Options Exchange Volatility Index, measuring S&P 500 options cost, ended at 12.11, 36 percent below its average for the last five years. Again last week in Japan, the Nikkei Stock Average Volatility Index slumped to 31 percent under its five-year mean, to 16.69.

According to Christine Lagarde, IMF Managing Director, shadow banking derived risks are increasing. While she pointed central banks can react to different excess valuations on the the market, Jens Weidmann, Bundesbank President, said low interest rates endangered financial stability.

G-20 finance chiefs stated they would carefully monitor potentially rising financial market risks, simultaneously firming up policy frameworks. They promised to fulfill exchange-rate commitments. The G-20 meeting attendants intended to alert investors against excessive risk-taking, but some chiefs said such alert would generate reactions in financial markets.

US and Canada’s policy makers are pressuring Europe into bolstering demand, and Canada’s Treasury Secretary said additional fiscal measures should be adopted by some EU countries. Prior to gauging on the need for further action to bring back inflation to 2 percent, the ECB will consider June and September monetary stimulus effects.

As finance chiefs and central bankers said, while implementing flexible fiscal strategies, conforming to near-term economic conditions, G-20 economies will guide debt, as share of GDP, towards a sustainable course. Policy accommodation should continue aiding economic recovery, and wherever evidence exists of deflationary pressures, they should be dealt with. With robust growth, monetary policy normalization would be warranted in advanced economies.

With the Fed nearing its first interest-rate hike since 2006, the greenback rose; ECB and BOJ easing is weighing on the yen and euro.

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