CHAPTER II DEVELOPMENTS AND TRENDS IN MATURE CAPITAL MARKETS
Author:
Mr. Donald J Mathieson
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Mr. Garry J. Schinasi
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Abstract

Slowing economic growth and mounting concerns about corporate earnings and high corporate leverage initially caused a sharp decline in equity prices and widening credit spreads in late 2000. The fall in equity prices was especially pronounced among technology stocks, which experienced virtually simultaneous dramatic declines in all the major economies. Fixed-income markets deteriorated in response to concerns about credit risk. In the high-yield market, in particular, flows dried up and spreads peaked at the highest levels since the 1990–91 recession. Markets revived in early 2001 following significant easing in U.S. monetary policy, with a particularly pronounced rebound in the high-yield market. Nevertheless, on balance, equity prices were lower and credit spreads generally higher at end-May 2001 than a year earlier. Despite the sharp repricing in U.S. financial markets, the record U.S. current account deficit, and substantially more monetary policy easing in the United States than abroad, the dollar continued to strengthen, as international investors showed a sustained strong appetite for private U.S. assets. Deteriorating market conditions weighed on bank earnings but, except in Japan, no concerns arose about the stability of any major banking system.

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