LONDON, Sept 18 (Reuters) - Financial markets have coped well with Brexit and other potentially disruptive political developments recently but asset prices may be running too high and the potential risks to market stability are growing, a report warned on Sunday.
In its Quarterly Review, the usually guarded Bank for International Settlements didn't explicitly say that stock and bond markets are bubbles waiting to burst. But valuations are high, especially given that the foundations they are built on may not be so solid.
BIS reports aren't known for their stark language and blunt warnings, but they offer an insight into what's occupying the thoughts of the world's most powerful and important central bankers.
"There has been a distinctly mixed feel to the recent rally - more stick than carrot, more push than pull, more frustration than joy. This explains the nagging question of whether market prices fully reflect the risks ahead," said Claudio Borio, Head of the BIS Monetary and Economic Department.
"The apparent dissonance between record low bond yields, and sharply higher stock prices with subdued volatility cast a pall over such valuations. Banks' depressed equity prices and budding signs of tension in bank funding markets added another sobering note," the Switzerland-based BIS added.
Central bank pledges after Brexit to provide liquidity and ensure smooth market functioning if needed, and the perceived shift towards a more accommodative global monetary policy framework soothed market jitters after Brexit, the BIS said.
This helped ensure markets functioned smoothly, especially in fixed income markets, even though the UK referendum outcome took markets by surprise.
The perception of "lower for longer" global monetary policy drove bond yields to record low levels, compressed corporate bond spreads, and pumped up stock markets and emerging market bonds.
"As Brexit receded in the financial markets' rear-view mirror, exuberance resumed in full force," said the Switzerland-based BIS, often seen as the central banks' central bank, in its review headed "Dissonant Markets".
Borio repeated the BIS's view that central banks should scale back their extreme policy accommodation, and that a more "balanced policy mix is needed to bring the global economy into a more robust, balanced and sustainable expansion."
To see the BIS review, click on: www.bis.org/publ/qtrpdf/r_qt1609.htm
BANK STRAINS
Stock prices are buoyant despite weak earnings, while comparisons between bond yields and economic growth rates across the world's major economies suggest government bond markets are extremely overvalued.