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Macroscope | Global recession fears and collapse in confidence could turn the dash for cash into a stampede
- Investors are running for cover as recession beckons, inflation and interest rates rise and global economic confidence withers
- Despite many turning to the US dollar as a safe haven, the continued rise in interest rates suggests cash will soon be king
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The world is no picture of health at the moment, and it’s no surprise that investors are running for cover from stocks, bonds and peripheral currencies. Recession is beckoning, inflation and interest rates are heading higher and global economic confidence is ebbing away.
With whispers of nuclear sabre-rattling emerging from Russia over the Ukraine crisis, it is no wonder that global financial stability is suffering and markets are flinching. Investors can hardly be blamed for thinking the world might be entering a new phase of upheaval on a par with the 2008 global financial crash.
They have limited options for sanctuary and, not surprisingly, many are turning to the US dollar. As global interest rates continue to rise, though, there is a growing feeling that cash is king.
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With so much global dislocation in evidence, the threat of a major credit crisis is increasing quickly. Borrowing costs are on the rise, global trading conditions are under duress and rising fuel prices are pushing energy-dependent, highly indebted nations’ balance of payments even deeper into the red. All this signals a major debt default could be on the cards.
World financial conditions are still recovering from 2008, and the Covid-19 crisis has left global policy reserves severely depleted. Economic confidence has almost become impervious to low interest rates and the easy availability of credit, while government budgets and debt piles have ballooned after years of fiscal reflation efforts. The cupboard of global policy options looks worryingly bare.
Global bond yields are only just starting to react to all the nascent risks and could have a lot higher to go. The close-to-40-year bull market for US bonds came to an end in August 2020 at the height of the pandemic, when 10-year US Treasury yields hit a historic low of 0.5 per cent.
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