This presentation provides and overview of the state of global financial markets as of October 2020 with a focus on the developments following the COVID-19 crisis and an assessment of market dynamics and downside risks

1. GLOBAL FINANCIAL MARKETS
Financial markets are recovering,
yet vulnerabilities remain
Committee on Financial Markets, October 2020
Directorate for Financial and Enterprise Affairs

2. Committee on Financial Markets
• The Committee on Financial Markets’ overarching objective is to promote efficient,
open, stable and sound financial systems, based on high levels of transparency,
confidence, and integrity, so as to contribute to sustainable and inclusive growth.
• The Committee’s core method to support this objective is through in-depth and
proactive surveillance of financial developments and analysis of their impact on
economic growth and stability.
• This presentation reflects the Committee’s current surveillance of global financial
markets and risk transmission mechanisms related to the economic and financial
consequences of Covid-19.
2

3. 3
Overview
Financial market developments following the
COVID-19 crisis
Assessment of market dynamics and downside
risks
1
2

4. 1. FINANCIAL MARKET
DEVELOPMENTS FOLLOWING THE
COVID-19 CRISIS
4

5. Unprecedented monetary and fiscal measures amid rising
downside risks
5
• Increases in the size of major central banks’
balance sheets reflect the implementation of
asset purchase programs and special
facilities that already surpass those
implemented during and after the Global
Financial Crisis (GFC).
• Fiscal measures helped support public
health and immediate business financing
conditions while contributing to possible
refinancing risks where short-term
maturities are elevated.
Source: National central bank websites, OECD calculations.
Note: OECD’s 2021 estimate is based on an assumption that a second wave of
coronavirus infections is avoided.
Source: OECD Economic Outlook Database.
Major central banks’ balance sheets Estimates of sovereign gross financial liabilities in OECD
economies
2.2 4.2 4.2 5.3 6.7 7.0 6.7 7.1 7.1 6.9 7.0 7.12.9
2.7 5.2 5.7 5.9
6.1
5.9 6.2 7.1 7.5 7.7 7.8
1.4
2.5
5.4 5.6 5.8
5.8
5.8 5.9 6.0 6.3 6.4 6.4
0.3
0.6
0.6 0.6 0.7
0.8
0.7 0.8 0.9 1.0 1.0 1.0
0
5
10
15
20
25
USD, tn
Total balance sheet
Federal Reserve European Central Bank
Bank of Japan Bank of England
0
100
200
300
% of GDP
2021 2019

6. Monetary and fiscal stimulus has supported a reflation of
equity valuations, yet recovery signals are mixed
6
• Uneven recovery of equity prices,
weakened by the resurgence of COVID-19 cases
and renewed lockdowns in some jurisdictions.
• US mega-cap tech stocks driving-up
market valuations even after the recent
price correction, suggesting markets remain
vulnerable to short-term shocks.
• Consumer discretionary and
technology sectors are leading rising
valuations, while harder hit sectors (banks,
real estate, utilities, consumer staples) show
signs of continued economic downturn.
Source: Refinitiv, OECD calculations.
Note: : Price-to-earning ratios are calculated using global sectoral equity benchmarks.
Source: Refinitiv, OECD calculations.
Performance of major equity benchmarks Price-to-earnings ratio of best versus worst recovering sectors
70
80
90
100
110
120
130
140
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20
Price index
(100=Jan-2020)
S&P 500 Technology S&P 500 excl. Technology
STOXX 600 NIKKEI 225
SHANGHAI A MSCI EM
5
10
15
20
25
30
35
40
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20
Ratio
Energy Healthcare
Technology Utilities
Basic materials Consumer discretionary
Consumer staples Industrials
Real estate Banks

7. Accommodative policies have reduced financing costs in
many countries despite rising leverage and refinancing
needs
7
• Fall in 3-year sovereign bond yields, suggesting
near-term financing relief despite rising
leverage of already highly indebted firms and
countries due to investors’ hunt for yield.
• 10 year sovereign bond yields are beginning to
diverge reflecting concerns about
economic prospects and additional
monetary and fiscal measures to boost
economic recovery.
Source: Refinitiv, OECD calculations. Source: Refinitiv, OECD calculations.
3-year sovereign bond yield 10-year sovereign bond yield
-1.1
-0.6
-0.1
0.4
0.9
Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20
% United States Euro Area United Kingdom Japan
-1
-0.5
0
0.5
1
Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20
%
United States Euro Area United Kingdom Japan

8. Corporate funding conditions remain strained for low quality
issuers, with rising downside risks under weak economic
conditions
8
• Decline in implied volatilities from March
peaks, yet recent increases reflect rising
concerns about renewed lockdowns and
uncertainty over US election outcomes.
• Credit quality deterioration of lower
rated issuers following renewed fall in oil
prices and rising corporate defaults.
• Rising risk of losses for financial
intermediaries from defaulted HY bonds,
leveraged loans and CLOs.
Note: Option-adjusted spreads are derived from ICE BofAML bond indices.
Source: Refinitiv, OECD calculations.
Note: VIX, MOVE and OVX are implied volatility on US S&P500 prices, US bond yield
and oil prices respectively.
Source: Refinitiv, OECD calculations.
Equity, bond and oil price implied volatility indices Selected high-yield corporate bond spreads
10
20
30
40
50
60
70
80
90
100
110
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20
Volatility index
VIX MOVE OVX
500
700
900
1100
1300
1500
1700
1900
100
400
700
1000
1300
Dec-19 Feb-20 Apr-20 Jun-20 Aug-20 Oct-20
Basis pointsBasis points
US BB US B
Euro High-Yield EMEs corporate High-Yield
US CCC (RHS)

9. Renewed weakness in oil prices on expectation of lower
demand due resurgence of COVID-19 cases and lockdowns
9
• Price decline since September due to renewed
lockdowns fracturing consumption recovery,
with a hard to predict outlook depending on
pandemic virulence.
• Growing stock price differential
between energy companies compared to
other sectors.
• Potential for a renewed decline in oil prices
amplifies risk to energy producers.
Note: Equity price indices are calculated using S&P 500 benchmarks.
Source: Refinitiv, OECD calculations.
Source: Refinitiv, OECD calculations.
International oil spot versus future prices Stock price index of US energy versus other US companies
20
25
30
35
40
45
50
55
60
65
70
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20
USD per barrel
Crude oil Brent spot Crude oil Brent 3-month future
30
40
50
60
70
80
90
100
110
120
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20
Price index
(100=Jan-2020)
Energy Other sectors

10. Record gold price and holdings reflect concerns as to
economic prospects
10
• Record gold ETF holdings and AUM
following concerns that COVID-19 and
resurgent geopolitical tensions could hit global
economic recovery.
• Jump in gold price and rising inflation
expectations is consistent with investors
holding gold to hedge investments in
light of historically low yields on sovereign
bonds.
Source: Federal Reserve Bank of St. Louis.Note: 2020 holdings are calculated using data available until end-September 2020.
Source: World Gold Council, OECD calculations.
Gold-backed ETFs (and similar) change in holdings by year 5-year breakeven inflation rate
-300
-200
-100
0
100
200
300
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
USD, bnChange (tns)
North America Europe
Asia Other
AUM (RHS)
0.6
0.9
1.2
1.5
1.8
2.1
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
%

11. Strained conditions in housing finance markets
11
• Sharp decline in RMBS/CMBS/covered
bond issuance following rising defaults on
home mortgages and commercial loans (mainly
retail and lodging sectors).
• Issued MBS and covered bonds prone to
downgrades due to credit quality
deterioration of underlying mortgages.
Source: SIFMA, AFME, OECD calculations. Source: Covered Bond Label Database.
US non-Agency issuance
European issuance
(including the United
Kingdom)
Global monthly mortgage-backed covered bond issuance

12. 2. ASSESSMENT OF MARKET
DYNAMICS AND DOWNSIDE RISKS
12

13. Record investment-grade corporate bond issuance contrasting with
strained high-yield and leverage loan markets
• Large IG companies taking advantage of
favorable conditions and lower capital
costs to raise cash while HY firms incur
more debt to survive cash shortages and
losses.
13
• Decline in leveraged loan issuance following
rising loan default rate and tightening
bank sentiment.
Source: ICMA, Dealogic.
Note: Leveraged loan issuance calculated using leveraged loan deal data in the
United States and in Europe. Financial companies are excluded from the
sample.
Source: Refinitiv, OECD calculations.
Corporate bond issuance Leveraged loan issuance
0
500
1000
1500
2000
2500
2015 2016 2017 2018 2019 Q1-2 2020
USD, bn
EUR Investment grade USD Investment grade
EUR High-yield USD High-yield
0
20
40
60
80
100
120
140
160
180
200
2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 2020 Q2
USD, bn
United States Europe

14. Rising defaults and materialising downside risks for lower rated
issuers could undermine economic recovery
• A wave of ratings downgrades reflect
credit quality deterioration of HY issuers.
• S&P US speculative-grade corporate
default rate expected to rise by March
2021 to 12.5% and 8.1% in the US and Europe,
as a global recession materialises amid the
COVID-19 pandemic.
14
• Rise in large US corporate bankruptcy
filings in the most impacted sectors,
already representing 50% of US bankrupt
firms during the GFC.
Note: S&P local currency long-term debt rating are used; or foreign current long-term debt
rating if previous not available.
Source: Refinitiv, OECD calculations. Source: UCLA-LoPucki Bankruptcy Research Database, OECD calculations.
US and European corporate rating downgrades
US public company bankrupt in 2020 versus during the GFC
0
2
4
6
8
10
12
14
16
0
100
200
300
400
OilAndGas
Consumergoodsand
services
Transportationand
utilities
Industrialmetalsand
mining
Manufacturingand
businessservices
# of
firms
USD, bn 2020
0
5
10
15
20
25
30
35
0
100
200
300
400
Financials
Transportationand
utilities
Manufacturingand
businessservices
Consumergoodsand
services
Industrialmetalsand
mining
OilAndGas
# of
firms
USD, bn 2009
Assets Number of firms (RHS)
0
40
80
120
160
200
Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20
Number of firms
Investment-grade downgrades High-yield downgrades
Fallen Angels Changes to negative outlook or watch

15. Renewed vulnerabilities in short-term funding markets
15
• Monetary policy actions calmed liquidity strains
in short-term funding markets triggered by
substantial outflows from Prime MMFs
amid investor de-risking and scramble
for cash.
• The combination of weekly liquid asset
requirements for Prime MMFs and some
constraints associated with Basel III
regulation for banks contributed to pressure,
causing divergence between Prime and
other MMFs.
Source: Federal Reserve Bank of St Louis. Source: Investment Company Institute, Refinitiv, OECD calculations
Assets under management by type of US MMFsSecured funding rates
-1
0
1
2
3
4
Feb-20 Apr-20 Jun-20 Aug-20 Oct-20
%
3-month AA non-financial commercial paper
3-month A2/P2 non-financial commercial paper
3-month AA financial commercial paper
Secured Overnight Financing Rate
3-month Treasury Bill
0
1
2
3
4
5
Jan-20 Mar-20 May-20 Jul-20 Sep-20
USD, tn
Prime Tax exempt Government agency Total Treasury

16. Sovereigns in EMEs likely to struggle to fund their financing
needs
16
• Sharp growth in deficit and debt
accumulation following the COVID-19
pandemic could put substantial pressure
on yields amid tepid investor demand.
Source: IMF Fiscal Monitor, April 2020.Note: Emerging market economies included in this chart are consistent with the list of
countries considered in the gross financing needs chart.
Source: IMF WEO Database, Refinitiv, OECD calculations.
• Persisting sovereign deficits in EMEs
combined with moderate EME indebtedness
levels compared to advanced economies.
Aggregate sovereign debt and deficit ratios for
selected EM economies
Sovereign gross financing needs in 2020

17. Rising downside risks for corporates in EMEs
17
• Increase in leverage and debt
accumulation, particularly in harder hit
sectors.
• Rising corporate default rates and
further deterioration in credit quality expected
as prospects for economic recovery
worsen amid the COVID-19 pandemic.
Source: Refinitiv, OECD calculations. Note: Default rates are derived from CreditPro data as of May 31, 2020.
Source: S&P Global ratings, 2020. Emerging Markets Monthly Highlights, July.
Debt-to-EBITDA among corporates in EM
economies by sector Corporate default rates in EM economies by
region
0
5
10
15
20
25
30
Ratio
Q3 2020 (current) Q2 2009 (Global Financial Crisis)

18. Effective policy actions have helped to calm financial
markets, yet challenges to financial resilience remain
18
• The unprecedented crisis response by major central
banks and finance ministries has largely calmed
major financial markets.
• However, leveraged finance markets remain under
pressure due to rising corporate losses, with contagion
effects evident in housing finance markets.
• Vulnerability of short-term funding markets
subject to rapid disruptions, despite MMF reforms
implemented following the GFC, suggesting broader policy
challenges remain ahead.
• Rising solvency risk in EMEs, in particular resulting
from weak economic fundamentals, weak balance sheets
and high dependence on commodities.
Effective crisis
response
Leveraged
finance markets
remain strained
EME risks are
rising
Short-term
funding
markets

19. .
Supporting financial markets during the pandemic
Financial markets policy guidance on the OECD COVID-19 Hub:
 Financial markets – financial fragilities and policy recommendations to address financing needs
 Public debt management – increased borrowing needs and market volatility
 Financial consumer protection – easing the burden on households
 Supporting financial resilience of citizens – financial awareness and literacy
Link to Recent OECD publications:
 OECD Economic Outlook, Interim Report September 2020
 Sovereign borrowing outlook for OECD countries 2020, SPECIAL COVID-19 EDITION
 OECD Business and Finance Outlook 2020
 Global Financial Markets Policy Responses to COVID-19
 COVID-19 Government Financing Support Programmes for Businesses
 Corporate debt stress testing: A global analysis of non-financial corporations
 Structural developments in global financial intermediation

20. FOR MORE INFORMATION PLEASE VISIT:
WWW.OECD.ORG/FINANCE/FINANCIAL-MARKETS/
FOLLOW US: @OECD_BIZFIN