An "uneasy calm" prevails in financial markets about the first increase in U.S. interest rates in almost a decade, which is widely expected later this month, the Bank for International Settlements said in its latest report.
The restrained reaction, especially from emerging markets, to the Federal Reserve's signals has been encouraging, the quarterly update from the Switzerland-based forum for major central banks said, though it expected volatility to return.
"Calm has reigned over financial markets, but it has been an uneasy calm," said Claudio Borio, the head of the BIS Monetary and Economic Department.
With interest rates in many parts of the world testing "the boundaries of the unthinkable day after day", Borio said it wasn't surprising how sensitive markets remained to the actions of major central banks.
"There is a clear tension between the markets' behaviour and underlying economic conditions," Borio said. "At some point, it will have to be resolved. Markets can remain calm for much longer than we think. Until they no longer can."
Equity trading at a discount to book value by banks in many countries remained a "clear sign of mistrust", he said, and the level of bad loans at euro zone banks needed addressing "vigorously".
The report also analysed recent investment, lending flows and debt issuance trends.
Between June and September, when global markets were rocked by worries about China's economy, slumping commodity prices and a surging dollar, debt issuance in emerging markets declined the most since the end of the financial crisis in 2009.
Across all markets, debt issuance dropped almost 80 percent compared with both the second quarter of this year and the third quarter of 2014.
Net issuance by Brazilian and Turkish banks and other financial firms was negative at -$2 billion and -$1.6 billion respectively. For Chinese financial firms, it fell to $300 million from $10 billion the previous quarter.
"The financial vulnerabilities in emerging market economies have not gone away," Borio said. "The stock of dollar-denominated debt, which has roughly doubled since early 2009 to over $3 trillion, is still there.
"In fact, its value in domestic currency terms has grown in line with the U.S. dollar's appreciation, weighing on financial conditions and weakening balance sheets."
A special section in the report said hard-to-measure forward sales of dollars to firms and funds, which are effectively dollar bank loans, meant non-bank emerging market dollar debt could "easily" be 10 percent higher than the $3.8 trillion headline estimate.
The report also examined how more countries around the world were selling euro-denominated bonds to take advantage of the record-low interest rates the European Central Bank's stimulus programme is creating.
Emerging markets issued 62 percent of all their bonds in euros between June and September, more than trebling the 18 percent share from March to June.
"What is perhaps new is that the euro seems to be taking on the attributes of an international funding currency, just like the dollar," said Hyun Song Shin, BIS Economic Adviser and Head of Research.
"Cross-border bank lending in euros to borrowers outside the euro area shows the telltale pattern where a depreciating euro goes hand in hand with greater euro-denominated lending to borrowers outside the euro area."