Investors are focusing more on politics and have become more selective in what they buy, the Bank for International Settlements said on Monday in its latest signal that markets may be breaking free from a dependence on central bank support.
The BIS said in its quarterly report that there had been increased discrimination across asset classes, regions and sectors, in contrast to the cross-asset "herd behavior" that has characterized recent years.
"Politics tightened its grip over financial markets in the past quarter, reasserting its supremacy over economics," the head of the BIS' monetary and economic department, Claudio Borio, said.
The BIS, often referred to as the "central banks' central bank", acts as a forum for the world's major monetary authorities. Its commentaries on global markets and economics give an insight into policymakers' thinking.
Borio called the drop in correlation between asset classes a "precipitous" one. Donald Trump's U.S. presidential election win had triggered so-called reflation trades that have seen Wall Street surge and both the dollar and U.S. government bond yields stay high.
"It was as if, after an unexpectedly rich meal, investors had to take their time to digest it. As a result, central banks once more stepped back from the limelight."
The report also touched on the political uncertainty in Europe, where upcoming French, Dutch, German and potentially Italian elections are influencing sentiment.
Euro zone government bond spreads, such as those between France and Germany, have widened. This has also drawn attention to the growing imbalances between weaker and stronger euro zone members in the European Central Bank's TARGET2 payment system.
However, the BIS found that the latter had more to do with the mechanical effect of ECB's large-scale asset purchases and that there was no such relationship with credit default swap spreads that investors buy as a protection against default.
Research by two BIS economists, however, struck a note of caution about the degree to which consumer-led growth was driving key economies like Canada, China, France, India, Italy, South Africa, Britain and the U.S.
"Consumption-led expansions tend to be significantly weaker than when growth is driven by other components of aggregate demand, often because of the build-up of imbalances."
It can also be a sign that growth is likely slow in the future, particularly if consumption-led growth goes hand in hand with rising debt.
ROCK AND A HARD PLACE
Higher bond yields and a stronger dollar also pose risks, especially to emerging markets, though the report acknowledged that many EM equity and credit markets have seen sentiment improve in recent months.
Nevertheless Borio said: "These countries have been caught between a rock and a hard place, the rock being the prospect of a tightening of U.S. monetary policy (even if gradual), an appreciating dollar and their FX currency debt, and the hard place the threat of rising protectionism."
There had been a slight increase in dollar debt in emerging markets.
U.S. dollar credit to non-bank borrowers outside the United States, a key gauge of global liquidity climbed $420 billion to $10.5 trillion in the six months to the end of September. Emerging market borrowers accounted for about a third, or $3.6 trillion. For the first time, the total includes dollar credit extended by banks in China and Russia.
At the same time global U.S. dollar funding for banks outside the United States rose to a new high of $9 trillion in September, driven by a $531 billion increase in offshore deposits of dollars since the start of the year.
"These structural changes highlight the increasing role of offshore dollar funding in the global banking system," said Hyun Song Shin, the BIS' economic adviser and head of research.