How much of a fall should the world’s financial markets brace themselves for?
If this ‘bloodbath’ stops short at a salutary correction - knocking maybe 10 to 20 per cent off equity valuations - it would be a mercy and a wonder
Annual meetings of the International Monetary Fund (IMF) and the World Bank seem to coincide with the onset of financial crises, as with the Hong Kong meeting in 1997 (Asian Financial crisis) and the Bali meeting last week (threatened crisis).
Do these gatherings trigger crises by exposing financial vulnerabilities, or exacerbate them (as with the 2008 meeting soon after the Lehman collapse)?
We could call this a “critical mass” theory. The annual gatherings of the so-called “Bretton Woods twins” bring together in one city (or beach resort, as was the case in Bali) not only finance ministers and central bank governors from some 180 countries, but also thousands of bankers and securities company heads (not to mention a few more thousand news-hungry journalists).
If the economic and financial woes of the world’s advanced and emerging economies are going to be laid bare in any one place, and at the same time, the annual meetings are often it. Small wonder then that they can also be places where greed gives way to fear, when things are looking bad, and sell orders get placed from a million mobile phones.
To say that the current market turmoil was a crisis waiting to happen is stating the obvious. This column, for one, has pointed repeatedly to draining global liquidity, rising interest rates, overstretched equity valuations, record debt levels and other vulnerabilities. But predicting crises and calling their timing correctly are different arts.
For those given to concocting (not too off-the-wall) conspiracy theories, the present storm in equity and bond markets might be seen as a case of “the empire strikes back.” The empire here is China which, with a few well timed disposals (or rumours) of parts of its US Treasuries war chest, is able to send bond yields spiking and equities crashing.
Why do that when China would be among those to suffer? Because a tumbling Wall Street could quickly take the wind out of the sails of the US economy and those of President Donald Trump, who has bragged repeatedly that the US is better able to withstand a trade war than is China. There is still time for him to back track if a Wall Street collapse is threatened. Signal sent!
The Trump trade wars have already turned into currency wars (as predicted in this column). By allowing the renminbi to depreciate, Beijing has signalled that it has other ways of fighting back than just imposing counter tariffs on the US. A falling renminbi takes some of the sting out of Trump’s tariffs by raising the local currency value of China’s exports.
Now, those currency wars are also becoming stock market wars as equities on Wall Street and elsewhere sense the first tremors of an earthquake, sending valuations tumbling and “wealth effect-induced” consumer spending booms and investment sliding too.
This shot across the bows could be enough to force Captain Trump to change course smartly from his collision tactics.
But what exactly happened in Bali to shift the attention of the financial community from the island’s mystic calm? There was no single fatal blow to confidence; it was more of a case of death by a thousand pin pricks.
There was the usual litany of reports from the IMF (the World Bank is too busy nowadays acting as a kind of quasi health-and-welfare organisation to have any relevance) warning that downside risks are increasing and calling for better stewardship of economies and financial systems. But “downside risk” is not a term that strikes fear into the hard hearts of financiers.
It may have been because the constant drumbeat of warnings had reached a crescendo, as IMF Managing Director Christine Lagarde appealed to policymakers to “work together to de-escalate current trade disputes and enter into constructive discussion” before trade wars spread from the main front to myriad supply chains that could disrupt global commerce and prosperity.
IMF Chief Economist Maurice Obstfeld was blunt. “Indicators of policy uncertainty have spiked recently, even if advanced-country asset markets remain less concerned,” he said. “The impact of trade policy and uncertainty are becoming evident at the macroeconomic level, while anecdotal evidence accumulates on harm to companies.”
In short, business is hurting, and that matters to financiers.
Developing countries were even more direct. “Global growth continues, but risks are rising with higher oil prices, rising interest rates, high debt levels and the threat of trade war as the top concerns, said Mangala Samaraweera, Sri Lanka’s Minister of Finance and Media, as well as chairman of the G-24 group of developing nations.
Volatile capital flows, foreign exchange pressures and higher borrowing costs have buffeted emerging markets as major economies have begun rolling back the very low interest rates that have prevailed since the 2008 Global Financial Crisis, said the Peruvian central bank governor Julio Velarde Flores, who’s also First Vice-Chair of the G-24.
Whatever the reason for what might come to be called the Bali Meeting Crash (like the Hong Kong crash in 1997 and the Lehman crash in 2008), a comment this week by Stephen Innes of currency trader Oanda seemed to sum up the situation.
“All bets are off,” Innes said. “The US equity bloodbath is taking no prisoner as a sea of red greets investors and equity deleveraging and liquidation intensify.”
If this “bloodbath” stops short at a salutary correction (knocking maybe 10 to 20 per cent off equity valuations, as some optimists suggest), it would be a mercy and a wonder.
The legacy of 10 years of furious debt build-up at the corporate, household and government levels plus irrational exuberance in stock markets will most likely be more than a mere technical correction.
Yet, if Trump calls off his trade troops and China buys back some US bonds, the “music” could continue for a while longer.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs