Despite the trade war and stock market gloom, a repeat of the 2008 financial crisis is not on the cards yet
- David Brown says while markets appear to be blowing off steam, global growth has held steady, the US economy is doing well and China is still recording a 6.5 per cent expansion
- Although the US Federal Reserve has raised interest rates, other central banks are alert to changing conditions that might call for more support
Things may be looking grim for markets, but it is certainly not time to panic just yet. Central banks are under no pressure to respond and will be watching, waiting and seeing how things pan out as the markets continue to blow off steam. Sure, there is some pretty bad news out there, but we are still in the domain of market correction, rather than outright global carnage.
It is a time for steady heads and calm reaction rather than hitting the exits and hunkering down for the coming storm. There is even a good case building for bargain hunting when the correction blows over. The key is when.
Global stocks may be heading for their worst losing streak in seven years with losses on MSCI’s all-country index down around 15 per cent from January’s peaks, but this is far from a rout. Trade war worries, Italy’s budget storm and China slowdown fears may seem serious, but there is no systemic collapse in sentiment on par with the 2008 crash.
There is still good news out there. Steady global expansion is running at around 3.7 per cent, according to the latest forecasts from the International Monetary Fund. America’s economy is steaming along at full employment, with the jobless rate close to a 50-year low. And China’s economy, far from being in the doldrums, is still racking up 6.5 per cent expansion. Meanwhile, the world is awash with liquidity, keeping markets and confidence afloat after so much global super-stimulus. It is far from being a picture of abject doom and gloom.
The US Federal Reserve has done the right thing in restoring higher interest rates and now has the leverage to cut it again if need be. Meanwhile, other central banks will be keeping their powder dry on tightening just in case demand conditions warrant support. Central banks are by no means running on empty and have fallback options waiting in reserve. The People’s Bank of China just needs to keep pumping extra liquidity into the economy and easing lending conditions as and when needed. There is no crisis yet.
In Europe, markets have seen it all before, with Italy heading towards financial ruin only to see disaster averted at the last moment. The European Union are past masters of fudge and unlikely to ruin the single currency and European stability for the sake of Italian populist parties running the show in Rome. Italy’s right-wing government is well aware of this and will exploit it to full advantage until Brussels comes up with a “compromise” over the budget row. The European Central Bank will be under strict instructions to maintain calm in the situation.
The US corporate earnings season might have disappointed cockeyed optimists in the markets, but they have not been a total disaster by any means. Companies might be complaining about headwinds from tougher trade tariffs, the stronger dollar and higher interest rates, but circumstances can change very quickly. In the coming weeks, a raft of factors could flip the odds back in the stock market’s favour.
Next week’s US midterm elections could be a game changer for equities if President Donald Trump loses control of either one or both chambers of the US Congress, leaving his scope to push through controversial legislation deeply holed below the waterline. It could make it much more difficult for Trump to apply more punishing trade tariffs, helping to defuse trade tensions at a stroke while turning perceptions on the US dollar at the same time.
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There are future Fed actions to consider too. History shows that markets sit up and take notice when central banks intercede to help smooth market uncertainty. The Fed will be well aware of the impact that US rate tightening expectations are currently having on markets, so the possibility of a gentle nudge on the tiller to help settle market nerves should not be ruled out in the coming weeks.
Last but not least, US data may come to the market’s aid in the next few days. This coming Friday, better than expected US non-farm payroll numbers upwards of 200,000 in October could be just the tonic markets need right now.
Global stock markets may be down but they are far from out.
David Brown is chief executive of New View Economics