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Financial markets enter a dangerous new phase

aaround Globally, financial markets are looking increasingly precarious. In the UK, government bond yields surged (see chart), sterling fell, urged the Treasury and Bank of England to issue statements to try to calm the market.government in Japan intervened For the first time since 1998, the foreign exchange market Increased reserve requirements For foreign exchange trading, to curb the outflow of currency. At the heart of the turmoil is the ever-rising US dollar and global interest rates. There is little relief on the horizon.

Each market has its own idiosyncrasies.The new British government Biggest tax cut in half a centuryJapan is trying to keep interest rates at the lowest level, bucking global trends. The Chinese government is suffering the consequences of a “no coronavirus” policy that has isolated the government from the rest of the world.

But they all face a common set of challenges. Most of the world’s currencies have depreciated significantly against the dollar.of dxyThe , a measure of the dollar’s value against a rich basket of global currencies, rose 18% this year, reaching a 20-year high. Continued inflation in the United States and a simultaneous tightening of monetary policy have sent markets into a frenzy. increase.

On the eve of last week’s wild volatility, the central bank’s club, the Bank for International Settlements, said financial conditions had changed as the central bank’s commitment to raising interest rates was priced in by markets and the US government’s liquidity.・The bond market deteriorated. After a modest rally in August, global equities hit new lows for the year. msci The All Country World Index is down 25% in 2022. The stress is evident elsewhere as well. Yields on U.S. junk bonds have climbed to nearly 9%, more than double his level a year ago.Investment grade corporate bonds rated bbbAccording to Bloomberg, the yield is around 6%, the highest in 13 years.

Corporate treasurers, investors and Treasuries expect volatility. Buy hedges and plan accordingly. However, the current situation is far beyond expectations. Just a year ago, few forecasters predicted double-digit inflation in much of the world. When markets turn worse than anyone expected, trouble sets in and policymakers are faced with a menu of bad options.

The Federal Reserve’s commitment to contain inflation is clear, regardless of the cost. After the central bank announced its latest rate hike on Sept. 21, Chairman Jerome Powell said the odds of a soft landing for the US economy had diminished, but the Fed was still doing its best to keep inflation under control. Stated. A study published by Bank of America found that between 1980 and 2020, when inflation rose above 5% in rich economies, it took an average of 10 years to return to 2%.

Global growth expectations are rapidly receding. The new forecast, released on September 26th, states: OECD Clubs in mostly wealthy countries look global gdp That’s up just 3% this year from the 4.5% forecast in December. In 2023 he is expected to grow by just 2.2%. As a result, commodity prices are falling. Brent crude is back at around $85 a barrel, the lowest since mid-January. Copper prices on the London Metal Exchange fell to their lowest in two months on September 26th. A weakening global economy could also cause companies to start lowering their earnings forecasts. This comes after global shipping company FedEx warned of a “softening in global trade volumes.” Rising interest rates have been painful for stocks. Earnings are also lower.

An economic slowdown may not lead to a weaker dollar. The dollar often rises during recessions as investors move toward the relative safety of global reserve currencies. For countries and companies around the world, it’s an ominous prospect.

https://www.economist.com/finance-and-economics/2022/09/26/financial-markets-enter-a-dangerous-new-phase Financial markets enter a dangerous new phase

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