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The coronavirus outbreak and the related oil price shock will lower sovereigns' economic and fiscal strength, increase weaker sovereigns' vulnerability to shifts in sentiment and expose weaknesses in domestic and international institutions, said Moody's Investors Service - Photo: Special

JAKARTA (TheInsiderStories)Equity markets saw steep sell-offs at the end of 2018, after escalating trade tensions between the United States (US) and China, rising uncertainty over Brexit weighed on investor sentiment, stoking financial market volatility, and widening global credit spreads, Moody’s Investors Service said in a report today (01/21).

Moody’s Financial Monitor provides the rating agency’s views on developments in financial markets and global banking systems. It assesses systemic risks and potential asset bubbles, excessive leverage, market volatility and the strength and evolution of bank fundamentals.

“Overall, market conditions have tightened recently on the back of widening credit spreads, rising market volatility and tightened market liquidity, but in our judgement systemic risks as a whole still remain moderate,” said Colin Ellis, Moody’s Chief Credit Officer for EMEA.

Global private bond issuance in 2018 only declined modestly from the peak in 2017 and was comparable to strong issuance levels in 2014 and 2015, despite high-yield issuance falling globally during the course of last year.

The report also notes how the S&P 500 ended 6.2 percent lower than at the start of the year, while the Eurostoxx, FTSE 100 and Nikkei 225 also declined by 14.7 percent, 12.5 percent and 12.1 percent respectively over 2018 in local currency terms.

In 2018, market implied and realized volatility in both the equity and bond markets picked up from decade-long lows a year before. Rising uncertainty typically corresponds with increasing risk premia and global credit spreads generally increased during 2018.

In particular, rising political risk in Europe contributed to higher corporate credit spreads in Europe than in the US in the second half of the year. And while high-yield credit spreads in Europe remain below long-term averages, they are now above the median since 2012.

High-yield bond issuance showed signs of weakening in the second half of 2018. While the issuance of investment-grade corporate bonds is also declining, the magnitude of the fall is more severe in high-yield corporate bonds.

In 2018, asset prices in emerging markets came under pressure, although that has abated recently. Part of that may reflect the US monetary policy normalisation. Despite the volatility seen during 2018, recent adjustments to emerging market exchange rates do not appear particularly unusual compared with past episodes of US monetary tightening.

Outflows from emerging market bond markets rose in 2018, partly unwinding the previous significant inflows to EMs, when investors were searching for higher yields in a low interest environment. As liquidity tightens, investors are becoming more selective, leading to increased differentiation across emerging markets.

This is credit positive for emerging market issuers, because such selectivity should limit contagion in the event of stress in a particular market. Banks are better prepared than three years ago to withstand a downturn or a period of more severe stress. In part, this reflects regulators requiring banks to increase their capital levels.

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