Usually I do a wrap up of the financial markets at the end of the week, but I am compelled to write something midweek with the U.S. Equities going on a roller coaster ride for the past couple of days. I am not one of the those Doomsday conspiracy theorists propagating a massive market crash in 2018 but something doesn’t feel right here. The holiday shortened week started off with the news hitting the wires that the Finance minister nominated by the prospective Italian government was rejected by the Italian President on account of being Anti Euro increasing the chance of snap elections which could become a sort of referendum on EU. This sent the Italian & German 10 year bonds to highest level in 4 levels & putting immense pressure on the banks in the region. By the time the U.S. equities started to trade fear had gripped the markets across the globe & it trickled to U.S. indices as well. Banks & the financial sector plummeted with widespread losses across the board and the two week consolidation of S&P 500 broke the support lower.
Just when it seemed the U.S. market had seen the top & was finally turning lower for the next leg down, we were in for another surprise today (Wednesday). In what has become pretty synonymous with the traders BTFD happened & 400 point loss a day earlier was cleaned with more than 300 point gain to close the markets. The financials rebounded along with the small caps. Now I know the bulls would be saying “We told you so!” but it’s not as simple as it looks. The problem is Europe is dealing with slowing growth, BREXIT & political turmoil in Italy & Spain and Greece bailout like situation might creep up any time which would not only be disastrous for European block but the panic could spread globally as we saw in the last financial crisis of 2009. However, we have an added complexity this time – China is slowing down as well. The second biggest economy is notorious for fudging economic numbers but looking at Shanghai Exchange Composite Index (above) things aren’t looking pretty.
The problems still don’t end here though. Greenback (US Dollar) has been ascending in a near vertical move recently which has put pressure not only on its Major counterparts but Emerging market currencies have been collapsing under this trend over the last month. The Turkish lira, Brazilian real, and Argentine peso are all down heavily against the US dollar. This has left them coping with ballooning import bills, spiking inflation & lower purchasing power adversely affecting their growth prospects. With the risk averse moves in the Equities further impetus is provided to the strength of the mighty dollar. Looking at the Dollar index you can gauge the magnitude of the problem.
There are multiple problems facing the world economy right now with EU political & economic risks, China slowing down coupled with trade tensions with U.S., emerging economies currency problems & to top it all off U.S equities still trading close to all time highs the risk of a recession is real & maybe imminent. And as things stand it maybe sooner than later. Not to be labelled as a pessimist I will sign off on a lighter note with this comic