Investors and traders worldwide are still licking their wounds and are anxious as they face this new trading week. The previous week was filled with brutal losses, with the 500-point drop (equivalent to 3%) of Dow Jones Industrial Average being one of the highlights. Aside from plunging US stock markets, there has also been huge losses in global financial markets, especially in the currencies of emerging economies and commodities, such as oil.
While trying to assess what will occur next, it is best if traders will consider some major factors that caused markets to be in its current disappointing situation.
Unlike the global financial crisis in 2008 and the taper tantrum in 2013, the trigger of this market decline did not come from developed countries. The losing of steam of emerging markets’ growth engines, particularly that of China, Turkey, Brazil and Russia, coupled with the economic slowdown in Japan and Europe, sparked the retreat.
Additionally, worries regarding the global growth were compounded by the difficulties experienced by policy makers in emerging countries when it comes to stabilizing their finances and averting further damage to their economies.
It can be said that emerging economies’ exports, especially raw materials, were affected the most from the combination of sluggish growth and lower prices of commodities worldwide. Moreover, market bloodbath was greatest in the currency market of emerging countries, with rates declining to levels lower than those seen during the 2008 global financial crisis. Technically, these markets are the ones that are most vulnerable to overshoot and may lead to significant spillovers on other financial markets.
Finally, investors are not really confident that central banks can act as effective stabilizers of the financial markets. During the release of the Federal Reserve’s minutes of the July meeting last Wednesday, the US central bank had no other option but to seem noncommittal to a September interest-rate hike. This just goes to show the difficulty in making a policy decision in a world that is over dependent on central banks and amid the complexity of the present economic situation.
Sure, the central bank of China might ease its monetary policy and the Federal Reserve could delay increasing its interest rates. However, the impact of these on global economic growth would tend to be minimal unless they are supported by more comprehensive policy responses. If not, prices in the various financial markets need to drop a lot more before cautious traders and investors get in the game.