Capital markets are essential for driving economic activity, providing mechanisms for raising funds and allocating resources efficiently, said Tobias Adrian, managing editor for the International Monetary Fund blog.
In the blog, Adrian went on to say market and financial-institution stability are, therefore, very critical, especially when market volatility and economic uncertainty are high, as they are now.
GROWING STABILITY RISKS
Adrian said an IMF report found that global financial stability risks have grown significantly, driven by tighter financial conditions and heightened trade and geopolitical uncertainty. The IMF assessment was supported by three financial-system vulnerabilities:
- Capital markets have become increasingly concentrated. For example, the US makes up nearly 55% of the global equity market, up from 30% two decades ago.
- Non-bank financial institutions have become more active in channeling savings toward investments since 2008, and their relationship with banks has continued to grow. Further sell-offs could strain some financial institutions, and the ensuing deleveraging could exacerbate market turmoil.
- Sovereign debt levels continue to rise, seemingly outpacing market growth. Government bond markets may see elevated volatility, especially those in countries with high debt levels. Riskier emerging markets, which have seen their sovereign bond spreads rise recently, may find it more challenging to refinance their debt or fund additional government spending.
POLICY RECOMMENDATIONS
Non-banks can benefit an economy if guardrails ensure they can weather adverse shocks, Adrian said. To start, enhanced reporting requirements could help supervisors develop a systemwide view of their activities and discern between those that provide helpful financial support and those that take excessive risk or are poorly governed.
Banks, as the foundation of the system, must be resilient to shocks, including those stemming from their increasing connections with non-banks, he said. Full, timely and consistent implementation of bank regulatory standards would ensure a level playing field and guarantee ample and adequate capital and liquidity.
With rising sovereign debt, resilience in bond market functioning can be built up by policies that promote the central clearing of bonds and the reduction of counter-party risks, while bolstering the resilience of central clearing, Adrian said.
It’s also important to ensure that key intermediaries in government bond markets are sound and operationally resilient. For emerging markets, credible frameworks to meet government financing needs can strengthen bond markets.
Other helpful tools include IMF-World Bank Medium-Term Debt Management Strategies for rolling over debt and assessing its currency composition and financing cost. Emerging economies may also consider ways to develop domestic markets for government bonds, as increased bond demand from long-term domestic investors has helped contain financing costs and external pressures in recent years.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $207.38 per cwt to $214.72, compared with last week’s range of $205.00 to $214.53 per cwt. FOB dressed steers, and heifers went for $321.91 per cwt to $333.53, compared with $322.23 to $329.95.
The USDA choice cutout Tuesday was down $1.79 per cwt at $331.73 while select was off $1.12 at $317.65. The choice/select spread narrowed to $14.08 from $14.75 with 95 loads of fabricated product and 39 loads of trimmings and grinds sold into the spot market.
The USDA-listed the weighted average wholesale price for fresh 90% lean beef was $379.75 per cwt, and 50% beef was $104.55.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.18 to $1.30 a bushel over the May corn contract, which settled at $4.75 3/4, down $0.06.
No live cattle were tendered for delivery Tuesday.
The CME Feeder Cattle Index for the seven days ended Monday was $288.78 per cwt, down $0.52. This compares with Tuesday’s May contract settlement of $286.92, up $1.40.