First came the hand-wringing over unsustainable stock valuations. Then it was fears of an emerging-market meltdown. Now Italy and the euro are in the crosshairs.
As the world ponders whether this year is when financial markets finally buckle after a nearly decade-long boom, there is no shortage of potential crises to keep traders awake at night. The year is less than halfway over and pundits have already evoked the dotcom bubble, the emerging-market chaos of 1997 and 1998, and the euro area debt scare of 2012.
This year’s gyrations are less extreme than those of past crises by most measures, but they have nonetheless jarred investors who have grown used to the central bank-induced state of calm that descended over markets in the past few years.
The question now is whether to buy the dip — a strategy that paid handsomely over the past decade — or to cash in on one of the biggest-ever bull runs for risky assets.
“We’re getting these mini crisis reruns that are really sapping sentiment,” said Patrik Schowitz, a global multi-asset strategist in Hong Kong at JPMorgan Asset Management, which oversees US$1.7 trillion. “Though it’s clearly not the same magnitude, it’s just one thing after another and people barely have time to digest things. A period of calm is what we need to let the market regain its footing.”
The backdrop to this year’s turbulence is the US Federal Reserve’s move to increase interest rates from rock-bottom levels that have prevailed since the 2008 global financial crisis. That is putting upward pressure on US Department of the Treasury yields and prompting investors to reassess valuations across a range of asset classes.
While this week’s turmoil in Italy has raised questions about how aggressively the Fed is to tighten policy, investors still see a hike in the middle of next month as a virtual certainty.
Nowhere was the valuation scare more evident earlier this year than in blue-chip technology stocks, which in February endured their first 10 percent sell-off in two years. While the rout wiped out US$1 trillion of market value at one point, it paled in comparison to the 82 percent slump in global tech shares after the dotcom bubble burst in 2000.
So far, the same has been true for this year’s panics over emerging markets and European politics.
About 20 years ago, the MSCI Emerging Markets Index lost more than half of its value as east Asia teetered on the brink of financial collapse, raising fears of a systemic economic meltdown. Turmoil in Turkey, Argentina and Indonesia this year has yet to spark anything close to the same level of contagion.
While political chaos in Italy has also punished markets in Portugal, Spain and Greece this week, bond yields in those nations are still far off 2012 levels.
It helps that China and the US banking systems are still widely viewed as sources of stability, even as politicians in the two nations spar over trade. Growth in Asia’s largest economy has been steady over the past few quarters and few expect Beijing to devalue its currency — a move that roiled global markets in 2015.
While dark clouds are forming over Italy’s banking sector and Deutsche Bank AG, the US’ financial heavyweights are making money hand over fist and have bigger capital cushions to whether downturns than they did in 2008.
That has not stopped bears, including billionaire investor George Soros, from warning of a calamity in the offing.
Soros on Tuesday said that a surging US dollar and capital flight from emerging markets might lead to another “major” financial crisis, adding that the EU faces an imminent existential threat.
Still, he has been calling for a global crisis as far back as 2011, and markets have mostly marched higher. Anyone who bought an S&P 500 Index fund after he warned of a 2008-like environment in January 2016 would be sitting on a gain of about 35 percent.
Given the uncertainty surrounding Italy and the removal of central bank stimulus, it is sensible for investors to pare their exposure and watch how events play out, said Hao Hong (洪灝), chief strategist at Bocom International Holdings Co in Hong Kong.
On the question of whether another big crisis is imminent, Hong said it is too early to tell.
“In this kind of environment, my advice is to take less risk,” he said.
Because much of what former US president Donald Trump says is unhinged and histrionic, it is tempting to dismiss all of it as bunk. Yet the potential future president has a populist knack for sounding alarums that resonate with the zeitgeist — for example, with growing anxiety about World War III and nuclear Armageddon. “We’re a failing nation,” Trump ranted during his US presidential debate against US Vice President Kamala Harris in one particularly meandering answer (the one that also recycled urban myths about immigrants eating cats). “And what, what’s going on here, you’re going to end up in World War
Earlier this month in Newsweek, President William Lai (賴清德) challenged the People’s Republic of China (PRC) to retake the territories lost to Russia in the 19th century rather than invade Taiwan. He stated: “If it is for the sake of territorial integrity, why doesn’t [the PRC] take back the lands occupied by Russia that were signed over in the treaty of Aigun?” This was a brilliant political move to finally state openly what many Chinese in both China and Taiwan have long been thinking about the lost territories in the Russian far east: The Russian far east should be “theirs.” Granted, Lai issued
On Tuesday, President William Lai (賴清德) met with a delegation from the Hoover Institution, a think tank based at Stanford University in California, to discuss strengthening US-Taiwan relations and enhancing peace and stability in the region. The delegation was led by James Ellis Jr, co-chair of the institution’s Taiwan in the Indo-Pacific Region project and former commander of the US Strategic Command. It also included former Australian minister for foreign affairs Marise Payne, influential US academics and other former policymakers. Think tank diplomacy is an important component of Taiwan’s efforts to maintain high-level dialogue with other nations with which it does
On Sept. 2, Elbridge Colby, former deputy assistant secretary of defense for strategy and force development, wrote an article for the Wall Street Journal called “The US and Taiwan Must Change Course” that defends his position that the US and Taiwan are not doing enough to deter the People’s Republic of China (PRC) from taking Taiwan. Colby is correct, of course: the US and Taiwan need to do a lot more or the PRC will invade Taiwan like Russia did against Ukraine. The US and Taiwan have failed to prepare properly to deter war. The blame must fall on politicians and policymakers