The ascent of Donald Trump to the US Presidency lessened market reliance on central banks, according to an influential body of central bankers.
The surge in US equity valuations which followed the election of Donald Trump meant central banks “stepped back from the limelight”, according to the Bank for International Settlements (BIS).
“Politics tightened its grip over financial markets in the past quarter, reasserting its supremacy over economics,” said Claudio Borio, head of the BIS monetary and economic department.
Trump’s election caused a “precipitous decline in correlations across asset classes, sectors and regions”, said Borio, with policy uncertainty looming large in investor thinking.
The US President has also left emerging market economies “between a rock and a hard place”, as debt held by poorer countries in US dollars rises in value and Trump tries to reshore manufacturing jobs by implementing protectionist policies.
Debt to nations around the world in US dollars has risen in importance during the last year, with dollar credit to non-bank borrowers in foreign nations growing by $420bn (£342bn), the BIS said. Overall dollar debt to emerging market economies now stands at $3.6 trillion (£2.9 trillion).
The BIS, known as the central banks’ central bank, also pointed to continuing dangers in China’s economy, with debt levels casting a shadow over continued growth.
Borio said there are “widespread vulnerabilities in the country’s burgeoning shadow banking sector.” China faces a “daunting task” in tackling its massive debt pile, he added.
In November the Bank of England identified China’s debt bubble as one of the biggest risks to the global financial system. Non-financial sector debt has risen by around 100 percentage points relative to GDP since the global financial crisis.
However, the BIS believes short-term prospects for the Chinese economy remain positive. Over the weekend the Chinese government reduced its GDP growth target to around 6.5 per cent this year, a rate still far above that of most other major economies.