The Bank of International Settlements (BIS), an international institution owned by central banks, warned that a normalization of monetary policy will likely trigger a string of sharp sell-offs in the coming months.
“The market tensions we saw during this quarter were not an isolated event,” said Claudio Borio, head of the BIS economic and monetary department, in the report. “Monetary policy normalization was bound to be challenging, especially in light of trade tensions and political uncertainty.”
The BIS report comes as stocks and CFD trading around the world are under increasing pressure from a range of factors, including trade war tensions and fears of an economic slowdown in the coming months.
“Financial markets went through a further sharp correction during the last quarter, marking another bump in the road as major central banks return policy to more normal settings,” the report said.
The BIS pointed to the interest rate hikes from central banks around the world, noting that the increases were especially challenging for equity markets. The U.S. Federal Reserve is expected to raise rates once again next week.
Policy normalization is the process of central banks reducing the size of their balance sheets and raising benchmark interest rates to bring monetary policy back to the same state it was in prior to the financial crisis of 2008.
The headwinds cited by the BIS in its review of the final three months of the year are expected to continue into at least the first quarter of 2019. That could spell trouble for global stocks.
Rising interest rates are a big concern moving into the new year. The U.S. Federal Reserve is expected to raise rates by 25 basis points this month. The Fed has also projected another three rate hikes next year.
The European Central Bank (ECB) announced on Friday that it will formally end its multi-trillion bond-buying program by the end of the month.
Another growing concern for investors is the U.S.-Sino trade conflict. China’s ongoing trade dispute with the U.S. may have a significant impact on the world’s two largest economies. China posted weaker-than-expected data on Friday.
U.S. President Donald Trump and China’s President Xi Jinping agreed to reduce the impact of trade tariffs for the first 90 days of the year. The agreement came during a dinner in Argentina on December 1.
But many are skeptical that China and the U.S. will come to a comprehensive trade agreement within this time period.