Chapter II: Key Developments and Sources of Financial Risk in the Major Financial Centers
- International Monetary Fund. Monetary and Capital Markets Department
- Published Date:
- March 2003
Financial conditions in mature markets stabilized somewhat since the beginning of the fourth quarter of 2002, although any improvements remain tentative. Major equity markets edged down in October before firming through December, but for the year as a whole posted the third consecutive annual decline. Trading in the first two months of 2003 gave back most of the late-year gains. Corporate bond markets came under some stress early in the fourth quarter but firmed up toward year-end, with both rates and spreads moving lower. A decreased attractiveness of U.S. fixed income securities contributed to a weakening of the dollar, particularly versus the euro. Performance in commercial banking was mixed, as retail franchises generally strengthened while wholesale business remained depressed. Insurance companies and pension funds were hurt by equity market declines. Balance sheets in some key nonfinancial sectors have stabilized and perhaps begun to improve. Monetary accommodation and caution on the part of investors have resulted in a buildup of cash positions in both retail and institutional portfolios, which has both favorable implications for financial stability as well as presenting new risks.