'Tuned Out' Investors Under Spell of QE: BIS
Equity markets shrugged off weak economic data and uncertainty in recent weeks and continued to extend their "relentless" gains fueled by the prospect of further stimulus, leaving them more vulnerable to shocks, the Bank of International Settlements (BIS) said on Monday.
The bank, which acts as a hub for the world's central banks, said markets are "under the spell of monetary easing" and warned that increasingly accommodative monetary easing has helped market participants to "tune out" signs of a global growth slowdown.
Indices were lifted to fresh highs off the back of further policy easing, despite a "spate of negative economic news," but such rapid gains have made equity markets increasingly vulnerable, the BIS said.
The BIS also said this "new phase" of monetary easing has helped create an environment that favors risk taking.
"This new phase of monetary policy accommodation in the major currency areas spilled over to financial markets around the world. With yields in core bond markets at record lows, investors turned to lower-rated European bonds, emerging market paper and corporate debt to obtain yield," the report said.
(Read More: Central Banks in Driving Seat for Asia Markets)
"Abundant liquidity and low volatility fostered an environment favoring risk-taking and carry trade activity."
The BIS said the limited contagion and the muted market reaction to the Cypriot bank bail-in was a further sign that investors are being swayed by news flow on monetary policy and the ECB's backstop measures.
(Read More: Cyprus Shows Urgent Need for Banking Union: S&P)
The uncertainty about global growth did however hit commodity prices as the all-commodities index lost 7 percent in April and oil prices fell below $100 a barrel for the first time in a year, while the rapid gains in the Japanese equity market left it vulnerable to changes in market sentiment.
"The Japanese equity market continued its relentless ascent, fueled by the prospect of massive monetary stimulus. The rapid gains left equity valuations vulnerable to changes in market sentiment."
(Read More: Japan Stocks Dive Ahead of Sensitive US Data)
"The 7 percent drop on 23 May was one such instance, triggered by a weak Chinese manufacturing PMI and a possible slowdown in Federal Reserve asset purchases. European stock indices lost 2–3 percent on the same day," the BIS said.
—By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave