March 2013 Quarterly Review: Markets grow confident on continued support

• Market participants' renewed sense of optimism has accompanied further policy accommodation, but macroeconomic performance is lagging behind.

• In the third quarter of 2012, BIS reporting banks posted their smallest increase in cross-border claims in 13 years. They increased their crossborder claims on non-banks located in the United States but cut their exposure to banks in the euro area.

• Inflation expectations returned to pre-crisis levels as central banks started to implement asset purchase programmes in late 2008 and early 2009. But further analysis suggests that these programmes were probably not the main driver of these shifts.

• Measures of financial conditions can improve our ability to explain movements in output, but they provide only limited information about future inflation.

• FX derivatives transactions by Chilean pension funds reduced stress in local FX markets during the global crisis.

• The BIS publishes new long series on total credit to the private sector.

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Summaries of individual chapters

Markets grow confident on continued support

Extensive policy support has infused markets with a renewed sense of optimism. Continued economic weakness has led to extensive monetary easing and a moderated stance on fiscal rigour. The resulting fall in perceived downside risk has buoyed markets and encouraged flows into riskier asset classes. As safe haven flows reversed, funds surged into equities and higher-yielding debt instruments, including those of emerging markets and the euro area periphery. But macroeconomic performance has yet to catch up with the renewed market optimism.

Highlights of the BIS international statistics

During the third quarter of 2012, BIS reporting banks posted the smallest quarterly increase in their cross-border claims for 13 years. An expansion of cross-border credit to non-banks, especially those in the United States, was largely offset by a decline in claims on banks in the euro area.

For the first time, the BIS released consolidated banking statistics for Korean banks. Korean data on an immediate borrower basis are available starting from the fourth quarter of 2011. The addition of Korea brings to 31 the number of countries contributing to the consolidated banking statistics on an immediate borrower basis. Korean banks have provided locational banking statistics since 2005.

Strong demand from foreign investors led to a surge of activity in emerging corporate bond markets in 2012 and early 2013. International debt securities statistics compiled by the BIS show that the stock of corporate debt securities issued by financial and non-financial corporations headquartered in emerging market economies (EMEs) ran to more than $1.6 trillion as of end-2012. But the investable universe of EME international corporate debt securities is only about one third of this total, as few securities have the size, liquidity and risk characteristics sought by foreign institutional investors.

Central bank asset purchases and inflation expectations^*

Boris Hofmann and Feng Zhu (BIS) examine the impact of the Federal Reserve's and Bank of England's post-crisis asset purchase programmes on market- and survey-based measures of inflation expectations. While measures of short- and longer-term inflation expectations quickly returned to pre-crisis levels when these programmes were initially implemented, the response of inflation swap rates on the days of programme announcements suggests that central bank asset purchases were not the main driver of these shifts.

Financial conditions and economic activity: a statistical approach^*

How do financial conditions affect the macroeconomy? Magdalena Erdem and Kostas Tsatsaronis (BIS) summarise the common variation in a large array of financial variables into a small set of statistical factors and use them to forecast GDP and inflation in four economies. They find that financial factors contain information beyond that in real economy-related variables. This information helps predict movements in real and nominal GDP, but less so inflation.

Hedging in derivatives markets: the experience of Chile^*

During the global financial crisis, Chilean markets suffered significantly less stress than those in other EMEs, whether in Latin America or elsewhere. Fernando Avalos and Ramon Moreno (BIS) suggest that this resilience was related to the considerable depth and liquidity of the country's FX derivatives markets, with this in turn being heavily driven by the hedging needs of its pension funds.

How much does the private sector really borrow? A new database for total credit to the private non-financial sector^*

Despite its importance, information about total credit to the private non-financial sector is scarce. Christian Dembiermont, Mathias Drehmann and Siriporn Muksakunratana (BIS) introduce a new BIS database on debt. They explain the key concepts behind the new series and the statistical techniques used, outline the high-level criteria applied and describe the characteristics of the underlying series. The authors then explore the historical evolution of total credit and reveal some interesting similarities and differences across countries.

* Signed articles reflect the views of the authors and not necessarily those of the BIS.