BASEL (AFX) - Financial markets are increasingly pricing in a moderate slowdown in US growth, the Bank for International Settlements said.
'The market seemed increasingly to price in a scenario where the US economy would experience a 'soft landing', cooling just to the extent necessary to keep upward price pressures contained,' the BIS said in its latest quarterly review.
It said data indicating weaker-than-expected US growth have sometimes actually been positive for share prices because expectations on future Fed interest rate hikes have been revised down as a result.
This has also led to a decline in bond yields, which has given further support to equities, it said.
Positive earnings news and upbeat announcements on growth prospects in the euro zone and Japan also helped stock markets recover after their sharp falls in May and June, it said.
Between May 10 and June 13, the S&P 500 index fell 7.7 pct, the Dow Jones EURO STOXX index dropped 13.3 pct and Japan's TOPIX index 16.5 pct, but markets largely recouped these losses in subsequent weeks.
However, investors still appear to be nervous about the outlook for equities despite the recent recovery, the BIS said.
'Despite the recovery, the brief sell-off of equities in May and June seemed to have left investors somewhat more nervous than earlier in the year, as indicated by higher equity price volatility,' it said.
Uncertainties about the US outlook may have been a factor in this increased volatility, but concerns about the outlook for corporate profits will have also played a role, against a background of geopolitical tensions and higher oil prices, it said.
'Geopolitical tensions, reflecting the outbreak of new hostilities in the Middle East, continued violence in Iraq, missile tests by North Korea and apprehension about Iran's nuclear plans, added to investors' uncertainty,' it said. steve.whitehouse@afxnews.com sw/ak COPYRIGHT Copyright AFX News Limited 2005. All rights reserved. The copying, republication or redistribution of AFX News Content, including by framing or similar means, is expressly prohibited without the prior written consent of AFX News. AFX News and AFX Financial News Logo are registered trademarks of AFX News Limited