Central bank group warns markets ‘under a spell’

FRANKFURT, Germany – Investors have ignored poor economic news as stocks have risen, leaving markets now vulnerable to unsettling volatility and potential losses, an organization of the world’s central banks said Sunday.

The Bank for International Settlements said central banks’ policies of record low interest rates and monetary stimulus had helped investors “tune out” bad news – every time an economic indicator disappointed, traders simply took that as confirmation that central banks would continue to provide stimulus.

That has left markets exposed to losses, particularly for bond holders, when interest rates begin to return to more normal levels, the BIS said in its quarterly report.

“Further monetary easing helped market participants to tune out signs of a global growth slowdown,” the report said. “But the rapid gains left equity valuations vulnerable to changes in sentiment, as witnessed in the recent bout of volatility.”

The BIS, based in Basel, Switzerland, represents the world’s central banks.

In its report, it said markets were “under the spell of monetary easing” to the point where negative news such as downbeat U.S. jobs data in March did not always stop stocks from going up. The U.S. Standard & Poor’s 500 reached an all-time high of 1,687.18 on May 22 and remains up more than 15 percent on the year.

The BIS said the volatility of the situation was underlined by a 7 percent drop in Japanese stocks on May 23, triggered by data suggesting China’s economy might slow and speculation the U.S. Federal Reserve might be getting ready to slow its aggressive stimulus policies.

The BIS said investors had several times shrugged off uncertainty because they expect any bad news to be followed by more central bank stimulus, such as continued low interest rates or bond purchases that increase the supply of money in the economy.