MacroscopeBetween inflation and cryptocurrencies, a stock market rout may send emerging economies over the edge
- As central banks raise rates to stay ahead of inflation, emerging economies with less robust growth and labour markets could scale back on fiscal support to cope with high prices and growing debt
- As crypto assets move more in sync with markets, they raise the risk of contagion across financial markets
The sudden plunge of the technology-heavy Nasdaq Composite index into correction territory (defined as a 10 per cent fall from a recent peak) was almost certainly a harbinger of worse to come, but more worrying are less obvious signs of systemic financial problems ahead.
There is trouble brewing in emerging markets, which suggests a market rout extending well beyond Wall Street and other advanced markets. Even worse, according to the International Monetary Fund, the fortunes of stock and cryptocurrency markets have now become linked in what could become a mutual spiral.
Yet still the idiocy persists in stock markets that this is some kind of manageable downward adjustment – another chance to buy the dip. This is nonsense. What seems to have escaped far too many stock investors and others is the fact that liquidity is draining rapidly from financial markets.
All boats rise and fall with the tide but the process might be more severe on the way down. Not only are the US Federal Reserve and other central banks draining liquidity by reversing asset purchases, it is also being sucked out by evaporating confidence.
It might not be necessary to shed tears for investors but the impact of a stock plunge on the wider economy from the current elevated heights could be disastrous. And the plunge will continue after the foolish buy-the-dip rally is over. Rising interest rates will see to that.