The volatility in global financial markets took a new turn last week. The economic and financial effects are expected to reach Taiwan as domestic markets reopen today after the nine-day Lunar New Year holiday. The local equity market might face declines this week, as financial markets in neighboring nations have remained weak despite major central banks’ efforts to ensure stability and predictability in international markets.
During last week’s global turbulence while local markets were closed, the Dow Jones Industrial Average fell as much as 1 percent before ending up 2 percent on Friday and major indices in Germany and France suffered losses of more than 6 percent before rallying on the last day of the week, while Japan’s Nikkei tumbled more than 11 percent and Hong Kong’s Hang Seng Index fell 5 percent.
Although Chinese markets were closed during the Lunar New Year holiday, investors would have been closely watching daily movements in the yuan/US dollar exchange rate, and China’s latest export and import figures for signs of the nation’s economic health.
Global equity markets have been in a slump since the beginning of the year over concerns about China’s economy, which is slowing faster than expected, the continuing decline in global oil prices and the increased fears of deflation in developed economies.
In addition, there are fresh worries caused by doubts over major central banks’ ability to wield their key monetary tools and hit their economic targets, with suspicions arising over whether central banks are capable of using their policies to stimulate aggregate demand in a sustainable way.
Over the past few years, major central banks have been injecting liquidity into markets through quantitative easing measures in an effort to increase consumption and boost economic growth.
However, as central banks in Japan and elsewhere are resorting to negative interest rates to pump more money into markets, concerns grow over whether they are running out of monetary ammunition to thwart deflation and kick-start the economy.
This is because there is little empirical evidence suggesting that negative interest rates would force banks to spend their cash. Nevertheless, the action itself has given a very strong message: The global economy is in trouble.
At the heart of all financial concerns is the US Federal Reserve’s interest rates and the outcome of its Federal Open Market Committee meeting next month. If the Fed decides to delay interest rate hikes until later this year, the market sentiment would be faced with a new reality: that the US and other economies are certainly in bad shape.
The magnitude 6.4 earthquake that hit southern Taiwan ahead of the Lunar New Year holiday has caused more than 100 deaths and negatively affected consumption and public sentiment. It might also negatively affect factory output this month and lead to economic losses in the current quarter.
Most investors in Taiwan’s stock market bid farewell to the Year of the Sheep in a sour mood with a loss of about NT$409,500 each, but they are welcoming the Year of the Monkey in an atmosphere of increased uncertainty.
The earthquake and economic slowdown, coupled with the weak global economy and volatility in financial markets, are no blessing for either the nation or investors.
While the government might tap the National Stabilization Fund and other state-controlled funds to prop up local markets, investors must exercise caution when gleaning market trends from government policy announcements, economic data releases and corporate announcements.
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