Friday, August 10, 2018

Global financial markets face radical changes

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Apparently the global heat-wave is not enough, new but adverse surprises head our way as a result of trade war implications that hit markets abruptly, with the possibility of a stronger market selloff than the one witnessed earlier in February 2018.

China’s decision to raise the forex reserve ratio rate raises further speculations, especially when the Chinese grow uncertain towards the yuan’s decline and start hedging to protect the Chinese economy and stock market, which has already lost 10% of its value since the outbreak of the trade war.

Raising interest rates as quickly and frequently by the Fed, has led other central banks to catch up with its pattern as the Bank of England raises rates despite Brexit challenges, followed by the ECB giving signals of a possible rate hike, and the suspension of the quantitative easing program.  Similarly, the Bank of the Japan decided at its last meeting to allow the bonds yield to move above the previous 0 level to 0.11 which means lowering the purchase of bonds. In a recent correspondence there was a proposal that the BOJ intends to raise interest rates twice this year.

Based on these facts above, it seems that the stock market will fall short especially with it having low liquidity compared to the currency market that has high liquidity.

The possibility of this scenario could get worse with the trade war feud ongoing, subjecting other countries affected by the US tariffs to reduce their currencies and compensate for the losses made, the biggest example would be China, devaluing the yuan to levels unseen since 2014 further resulting in the surge of its trade surplus instead of shrinking, the US could then acknowledge this as currency manipulation and take decisive measures.

ADSS strategic team had previously highlighted the process of other countries devaluing their currencies in order to compensate the losses made from when the trade war started, in addition to hinting last week of a potential US intervention to stop currency manipulation.

 
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