A hefty 400+ point reversal in the U.S. Equities yesterday has flashed a warning sign for things to come. The markets made a massive reversal as the Tech stocks rolled over. It’s not the thought of a bear market or even a global recession that is bothering me right now but the thoughts of a disruption of the whole financial system that keep popping up in my head. Why you say? Let me elaborate…
The winds of change started to blow with Brexit – when Britain voted to come out of the European Union in June of 2016. One of the biggest Economic & Political blocks that came into being with 12 member countries in 1993 had its first high-profile exit. The policy of inclusion, political & economic unity and free movement of trade, labor & capital that the west has thrived upon ever since the Second World War was put to its biggest test but the worst was yet to come.
As Europe reels on the back of lengthy & complex Brexit negotiations, political uncertainty and a slow down in the region a new U.S. administration took power which made good of its election promises and decided to pull out of TPP (Trans Pacific Partnership), entered into NAFTA (North American Free Trade Agreement) renegotiation & imposed all sorts of tariffs on most of its trading partners who have been America’s staunch allies militarily, politically & economically. It is pretty evident that the U.S. is in no mood to give any concessions as it was evident from its stringent approach at the recently concluded G-7 meeting. We will leave the discussion of whether this is the right step for another day.
Of course, anything U.S. says or does being the biggest & most innovative economy of the World has a major impact on the global financial system, but the cyclical economic factors around the world have strengthened the case of a major downturn, which has the potential of causing a major financial meltdown if the confrontational policies of the Economic power houses continue. Europe has been slowing down significantly in the recent months, Chinese stocks have plunged over 20% wiping out $1.8T in market value since January of this year, officially entering the bear market territory.
The Emerging markets have been in doldrums facing a resurgent & resilient US Dollar causing major inflationary & balance of payment issues in countries like Argentina, Turkey, Brazil & South Africa to name just a few. Compounding this is the rising Oil prices which would cause the inflation in these countries to rise further thus pushing the Central banks to raise interests. This is exact opposite of what the Central banks are expected to do when the an economy is slowing down. And while the American markets have been guarded from this downturn in Global markets and has been performing better than their counterparts elsewhere the economic fundamentals & the political friction would catch up at some point as we saw what happened yesterday when even the good news couldn’t lift market.
To top it all off the U.S tariffs is not going to be a one way street as we see the immediate retaliatory tariffs announced by China & EU on U.S. products. And it doesn’t stop there, Bloomberg reports Canada & EU is preparing tariffs and quotas on steel from China and other countries to prevent a potential flood of imports from global producers seeking to avoid U.S. tariffs. So you can see this tariff war ignited by U.S. is spreading like a wildfire & everybody stands to lose from this trade confrontation.
Even the currency markets have not been spared from the friction on the financial front lines. As the recent slump in the Yuan ignites fears over China’s economy, policy makers seem less willing to halt the currency’s decline amid the trade battle with the U.S. The yuan slipped to a fresh six-month with the pegged currency touching a new low against the US dollar. PBoC (Chinese Central Bank) actually allowed the biggest one-day weakening in the currency in percentage terms since January 2017. It’s not a secret to anyone that a weaker Yuan benefits the largely export dependent Chinese economy.
Maybe the disruption of the current financial system is not a bad thing after all, Maybe it’s time to overhaul this rotten financial system to one that benefits all – a decentralized system which functions on the principles of Transparency, Equality & Efficiency – one which puts the decision-making in the hands of the common man and away from the Power corridors, Big Corporations & Central banks. Any guesses?
I sign off with a comic that perfectly depicts the current state of the Global markets.