Brit­tle mar­kets vul­ner­a­ble to all shocks

The Pak Banker - - MARKETS/SPORTS -

Fi­nan­cial mar­kets that pre­dicted eight of the last six re­ces­sions may be yet be wrong again, but mar­ket stress it­self is now part of the cal­cu­lus and leaves the world more open to left-field shocks.

Given the vi­o­lence of this year's slump in eq­ui­ties, where more than $8 tril­lion has been wiped off global stock mar­ket val­ues, it is re­mark­able how few econ­o­mists still see re­ces­sion as the most likely out­come.

Yet more and more be­lieve it will be a close-run thing; pro­tracted mar­ket volatil­ity it­self could well tip the bal­ance and in­vestors are in no mood to hang about for a con­fir­ma­tion. Anx­i­ety is high, with few ex­tra­or­di­nary pol­icy mea­sures now likely or even avail­able, and more neg­a­tive in­ter­est rates in Europe or Ja­pan seen by many as part of the prob­lem rather than the so­lu­tion for a bruised bank­ing sys­tem.

It may take a nervy few months for clar­ity on whether the wor­ry­ing slide in global in­dus­try, trade and in­vest­ment late last year has deep­ened, or to see if in­debted con­sumers and a still-grow­ing ser­vice sec­tor will save the day.

While they wait, in­vestors are scru­ti­n­is­ing the many geopo­lit­i­cal risks and sys­temic con­cerns that would typ­i­cally be ig­nored in pe­ri­ods of more ro­bust growth, but which may now be mag­ni­fied as ad­di­tional threats to busi­nesses' and house­holds' in­vest­ment or spend­ing plans.

In cut­ting its world growth fore­cast for this year to 2.7 per­cent from 3.1 per­cent - still above the 2-2.5 per­cent level many see as a base­line to avoid an ef­fec­tive per-capita global re­ces­sion - Axa In­vest­ment Man­agers flagged con­cern about sys­temic as well as cycli­cal risks for mar­kets in this cli­mate.

"When global growth is so slug­gish, when cor­po­rate prof­its are so mis­er­able, when pay rises are so small - you don't need a very big shock to dis­turb global mar­kets sig­nif­i­cantly," said Eric Chaney, Chief Econ­o­mist at French in­surer Axa.

A sud­den change of fi­nan­cial and eco­nomic pol­icy think­ing within China's rul­ing com­mu­nist party was one pos­si­ble shock it out­lined. The political and cen­tral bank­ing dilemma sur­round­ing the euro zone's in­com­plete bank­ing union was an­other soft spot.

But on a knife edge in terms of prob­a­bil­i­ties is a ref­er­en­dum on Bri­tain's pos­si­ble exit from the Euro­pean Union, likely to be held by the end of June. For Ax­aIM, this con­tains huge un­cer­tain­ties for world fi­nan­cial mar­kets, for Bri­tain as a top five world econ­omy and the wider EU as a durable con­struc­tion.

"Lon­don is the num­ber one fi­nan­cial cen­tre, for ex­am­ple. If there was any desta­bi­liza­tion of the fi­nan­cial in­dus­try in the UK, it would trans­mit quickly around world mar­kets," said Chaney, adding that this went be­yond lo­ca­tion and into ques­tions about the ex­tent to which English law, which dom­i­nates global fi­nan­cial con­tracts, is in­flu­enced by EU law.

But is the world in a bet­ter place than mar­kets let on? Some banks, such Mor­gan Stan­ley and So­ci­ete Gen­erale, put the chances of a global re­ces­sion this year at about one-in-five. Oth­ers, such as Citi, say the risk is ris­ing all the time. Bank of Amer­ica Mer­rill Lynch sees a 20 per­cent chance of a U.S. slump.

Who­ever you be­lieve, re­ces­sion is no longer off the radar. The en­ergy shock saw world in­dus­trial ac­tiv­ity barely grow at all in 2015 and it tailed off alarm­ingly in the back end of the year.

World trade growth too has stalled as China splut­ters, and huge an­nual drops of be­tween 11 and 18 per­cent in Chi­nese ex­ports and im­ports in Jan­uary should ring more alarm bells. Global ship­ping freight prices have col­lapsed to record lows.

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