the relaxation of commercial tensions has encouraged risk taking

The Bank for International Settlements (BPI) notes that "the relaxation of trade tensions in mid-October encouraged a phase of greater risk taking in international financial markets."

In its last quarterly report of December, published this Sunday, the BPI says that "stock prices tended to rise, marking new highs in the United States in November."

At the same time, credit spreads narrowed and sovereign bond yields considered safe rebounded slightly.

Despite this, the economic outlook remained weak and inflation depressed, so the central banks made their monetary policy more flexible.

Interest rates fell in the US, the euro area, Brazil, China, Indonesia and Mexico.

The BPI analyzes in the report what happened in the financial markets on October 11 after the concern over a "brexit" without agreement disappeared, following a meeting of the British and Irish prime ministers, and the announcement of an initial agreement between the US. and China

These announcements marked a turning point for asset prices, according to the BPI, which assists central banks around the world.

Equities rose worldwide except in China, which fell in October and November. In the US and France, share prices have reached historically high levels.

To the extent that demand for safe assets fell, the dollar depreciated, especially against currencies of emerging economies.

Other currencies that are traditionally considered safe assets in times of uncertainty, such as the yen and the Swiss franc, remained or depreciated against the dollar.

Another sign that the appetite for risk had increased was that the currencies of emerging risk economies also appreciated against the greenback.

The BPI, which is based in the Swiss city of Basel, questions "the sustainability of asset valuation levels" for the renewed propensity to take risk, together with lax financing conditions.

Corporate bonds are very expensive, considering that the economic outlook is weak and the values ​​of US stocks are high compared to historical averages.

"The compensation demanded by investors for taking risk seems to be falling on term premiums: to the extent that they are unusually low, valuations are enhanced," according to the BPI.

The head of the Monetary and Economic Department of the BIS Claudio Borio, observed when presenting the report "relatively demanding levels of asset valuation, high risk assumption and changes in the financial system of difficult interpretation".

"The combination points to certain vulnerabilities in financial markets that deserve the careful consideration of market participants no less than of central banks," Borio said.

At the beginning of 2019 a gap began to open between the high value of corporate bonds with investment grade from the US and the euro area.

This disconnection was less pronounced in corporate bonds of emerging economies.

Another sign of the strong appetite for risk is that the demand of high risk bond investors remains high.

The US market for high-yield bonds saw issues worth 34,000 million dollars (about 30,910 million euros) in September, an amount that exceeds all monthly totals since January 2018 and the monthly average of 23,000 million dollars between 2010 and 2017 (about 20,910 million euros).

In October, bond investment funds that focus on countries classified as border markets saw the second highest inflow of funds year-on-year.

Total assets managed by these funds rose from 3,700 million dollars (3,364 million euros) in November 2018, to 5,400 million dollars last October (4,910 million euros).