In the bank’s latest survey of over 550 market professionals, it was uncovered that 58% of respondents expect a change of up to 10%. Meanwhile, 10% of respondents are forecasting a sharper sell-off in the equity market, and nearly 31% of investors believe that the markets will reach 2022 without seeing a decline.
The survey revealed that the greatest risk to the current relative market stability was new variants of the Covid-19 virus that are vaccine-resistant. 53% of survey respondents said that this was the factor that concerned them most. Other prominent concerns included economic growth that is weaker than expected, higher than anticipated inflation, a central bank policy error, and waning vaccine efficacy.
Other survey respondents also expressed concerns over the debt burden, geopolitics, fiscal policy being tightened too rapidly, and a tech bubble bursting.
The past year has seen global stock markets recover well from the pandemic due to central bank stimulus, government spending, and vaccine rollout programmes. Since the crash in March 2020, global markets have almost doubled, with the FTSE 100 is almost up 8% year-to-date.
However, economists are concerned that the recovery seen so far is beginning to lose pace as the Delta variant continues to spread across the globe. Deutsche Bank’s survey found that 44% of global investors expect lockdown restrictions to continue as they have been, while 34% of respondents believe further restrictions will be introduced.
Bank stocks plummeted internationally on Thursday, as the release of companies’ Q2 earnings have demonstrated the influence that the COVID-19 pandemic still holds over world economies.
Among those banks adversely affected in the second quarter were Lloyds Bank, which reported loss provisions at a rate higher than was forecasted, and BBVA and Standard Chartered, which both saw profits slide.
Combined with a historic contraction in the US economy, these bleak reports triggered a sell-off across the banking sector. The Euro Stoxx Bank index, which tracks the biggest banks in Europe, fell by more than 3%, and the MSCI European Banks index (which includes both British and European banks) fell by 2.6%.
Major stock markets were also dragged lower on Thursday; the FTSE 100 fell by 2% before noon, and the DAX and Spanish IBEX 35 fell by 3% and 2.7% respectively.
In all, the sell-off pointed to increasingly pessimistic investor attitudes in the wake of the COVID-19 pandemic. “We have seen the UK economy deteriorate since the first quarter,” remarked Lloyds CEO António Horta-Osório as the bank’s half-year profits were completely submerged by its setting aside of £2.4 billion as a loss buffer – £1 billion greater than analysts estimated. Shares in Lloyds subsequently fell by 9%, an 8-year low.
Barclays also fell below analysts’ expectations in its Q2 results, and Santander announced a quarterly loss of €11.1 billion, the largest such loss in its 163 years of operation.
The VIX volatility index – which is commonly used to gauge the fear level among investors – jumped by 36%, leading the markets to become particularly volatile. Losses have been widespread. In the week of the 5th of August alone, the NASDAQ plunged 3.5%, the S&P 500 and Dow Jones both dropped 3%, the FTSE 100 fell by 2.5% and both the French CAC 40 and German DAX 30 saw decreases of around 2%.
With neither side willing to be the first to blink, investors are increasingly seeking out ways to properly insulate themselves from the instability of the market. However, given the unpredictability of the conflict itself, this is no simple task. So, to help you make the best decisions that you can, here André Lavold, CEO of Skilling, takes a look at what has gone on and how some key stakeholders have reacted.
The present state of play: tariffs, tweets and devaluations
Under this current American administration, trade conflicts are never truly resolved; instead being defined by periods of escalation and détente. May saw the US choose to increase the levels of tariffs on $200 billion of Chinese goods, to which the Chinese responded by raising tariffs of its own on $60 billion of US goods. At the G20 summit in Osaka, both sides publicly agreed to a ‘truce’, however this was almost immediately reneged upon by the Americans after the President tweeted that he would levy an additional tariff of 10% on $300 billion of Chinese goods.
This brings us to the current state of play. While the US and China have always treated each other in an adversarial fashion, the latest measures have escalated the conflict to a new level of significance. The latest round of tariffs, most of which will be introduced in the autumn and winter of this year, now focus on consumer-facing goods like electronics and clothing. Companies with significant exposure to China – such as Nike and Apple, who saw their stock prices fall by 3% and 5.2% respectively – were especially affected. With importers likely to pass on the price rise to consumers, these new measures will likely negatively impact consumer spending. With the US household being the backbone of the American economy, the odds of a severe economic slowdown or recession are increased.
Companies with significant exposure to China – such as Nike and Apple, who saw their stock prices fall by 3% and 5.2% respectively – were especially affected.
Knowing that this was likely to hurt its export-reliant economy, the Chinese took action. The People’s Bank took the strategic decision to allow the Yuan to depreciate below the seven per dollar rate for the first time since 2008. Being a floor that the Chinese Government had vigorously defended in past, many have suggested that this was a retaliation against the latest round of tariffs. While it’s only possible to speculate on whether this was indeed retaliation, there would be scores of evidence to suggest so. The positive current account balance which China maintains with the US means that its own tariffs are not as effectual as those implemented by the United States. However, by letting the Yuan weaken, this not only reduces the price of Chinese exports but also reduces the profit of American companies with operations in China.
Spillover: has a trade war become a currency war?
Having considered China’s actions as combative, the United States took the historic decision of labelling China as a currency manipulator; the first time it had done so since the Clinton administration in 1994. The President has also previously attacked the Federal Reserve for not choosing to cut interest rates, stating that this has led to an appreciation in the value of the dollar; making American organisations uncompetitive on the global market.
His rhetoric, combined with the greater chances of a global economic slowdown, suggests that a devaluation in the dollar could be forthcoming. A tough business environment would vastly increase the likelihood of intervention – be it quantitative easing, or lower interest rates – and this would result in the dollar losing value.
With both sides now flirting with the idea of a currency ‘race to the bottom’, this could develop into a very dangerous game of chicken.
With both sides now flirting with the idea of a currency ‘race to the bottom’, this could develop into a very dangerous game of chicken. While China has much to gain from a devaluation, it also has much to lose. Let the currency slide too far, and there is a great risk of capital flight. Similarly, as previously mentioned, given that the US retains a trade deficit of approximately $488 billion, it will be hard to let the dollar fall without impacting its own businesses.
The ultimate effect of this will be volatility in the currency markets, especially in the USDCNY pair, and for traders, this can create lots of opportunities.
Wider reactions
With such unpredictable market forces at play, currencies and commodities that are considered ‘safe havens’ such as the Japanese Yen, the Swiss Franc and Gold have seen rises, as traders look for ways to protect their earnings. As long as the market remains volatile, they will continue to be good prospects. However, with the Japanese economy also being very reliant upon exports, traders should be wary of potential intervention.
The conflict has also led to lower oil prices, as doubts have been expressed in the general economic climate. This has impacted commodity currencies such as the Canadian Dollar and Norwegian Krona. The Australian Dollar has been doubly impacted as, in addition to being relatively reliant on natural resource exports, its economy is also uniquely exposed to the Chinese market.
Given the present impasse, it’s becoming increasingly likely that the trade war will not cease for some time. With both sides willing to dig their heels in, it may take a governmental change for the situation to develop any further. However, in the meantime, there are steps that you can take to protect your earnings. Minimise the risk of loss by auditing your portfolio and making sure that you’re comfortable with its allocation. By doing so, you ensure that you continue to earn at your fullest potential.
The year 2017 has been eventful in terms of the various socio-political and economic developments across the world. Here is Mihir Kapadia’s quick summary of the year as it was.
The Year of Elections
After 2016 gave us Brexit and Trump, political and economic analysts across the developed world were wary about the possibility of protectionism spreading across the European continent, especially as 2017 was due series of elections in the region. With The Netherlands, France and Germany, the three big powerhouses of the European Union, going to the polls, there was a real threat of right-wing populist parties gaining prominence and altering the mainstream and liberal values of the western developed economies. The fear was legitimate, as EU sceptics appeared to be inspired by Brexit and Trump and were engaging on similar campaign promises based on nationalism and the closing of borders.
The year delivered relief across the continent, as liberal political parties emerged victorious over right-wing populists; however, the political dynamics and discourse in the region were considerably altered. Eurosceptics including Geert Wilders in The Netherlands, Marine Le Pen in France, and the Alternative for Germany (AfD) party gained mainstream prominence and considerable representation in their respective countries.
Germany is currently in a difficult spot, as none of the parties secured a working majority, Angela Merkel’s CDU has been attempting to negotiate a ‘grand coalition’, in an attempt to break the current political deadlock after coalition talks with the pro-business Free Democrats (FDP) and Greens collapsed. While brokering a grand coalition across parties in the parliament can deliver governance, it is too early to comment how strong the Chancellor’s leadership and authority would be.
Trumping the Stock Markets
While protectionism and populist policy proposals have been part of the 'Make America Great Again' campaign slogans, the larger driver behind the 'Trumponomics' rally has been the hope that President Trump can push through policies to stimulate growth and increase corporate profits. Anticipation of infrastructure expenditures, healthcare reforms and tax cutting legislation helped rally the stock markets to a series of all-time highs. While the stock market has consistently risen strongly since November 2016, despite the fact that many of Trump’s key promises such as infrastructure spending and healthcare reforms are yet to materialise, there are increasing fears that the US stocks are being overvalued. However, these concerns have been there since 2003 when the current long equity rally began.
Meanwhile, the dollar has had a rough year, having lost about 9-10% in 2017, but Trump has probably been happy to see it fall, as it will help boost US exports.
Financial analysts observing the uptrend in the US stock market over the year have cautioned that the markets may already be overpriced. The last time the US economy had a meltdown, it was 2008 and it affected the whole world. The 2008 financial crash occurred because of fragility in the banking system due to poor mortgage lending. The US is currently trending positively on earnings, employment, wage growth, housing and GDP. These indicate no signs of an impending recession; and the Federal Reserve is likely to raise interest rates through 2017 and into 2018. Trump has been indirectly very good for the economy.
Dull year for Gold
The significant threat globally throughout 2017 has been North Korea's aggressive stance against the US and its regional allies - South Korea and Japan. The year-long nuclear ballistic tests and provocative missile launches rattled Asian markets, but net impact was negligible and equities have risen in Asia and elsewhere. Therefore, safe-haven assets, such as Gold, received little support due to these threats.
Globally, the bullish stock market, rising interest rates and a sense of market security proved to be bad news for Gold, US-denominated assets such as Gold are influenced by the movements of the dollar, and its fortunes are also tied to the dollar among other factors. The US dollar has fallen nearly 10% year-to-date (or YTD) in 2017.
Under a bullish Federal Reserve, the commodity had already priced in the factor of interest rate hikes. Only if the actual rate of increase is lesser than expected, gold prices may benefit and see some relief going into 2018. Investors therefore will keenly observe the Fed’s tone when they discuss the interest rates for next year to understand how they would progress into 2018.
Brexit uncertainty remains
Brexit continues to dominate the UK’s political and economic spheres and the year began with the invoking of Article 50 by Prime Minister Theresa May on 29th March 2017. Political discussion around Brexit also led the country into a snap general election in June, resulting in the Conservative Party losing their majority, and further splitting the British parliament.
Since the Brexit referendum of 2016, the pound lost 10% against the Euro and 17% against the Dollar. The fall in the value of the pound in fact worked in favour for the stock markets, with the FTSE100 (which largely comprises of exporting organisations) having reached record highs through the year. While the fall in the value of the currency may have helped British exports, the benefit stops there. Rising inflation and weak wage growth in the UK have directly affected the average British household as the period of uncertainty continues.
While Brexit is inevitable, the financial sector, which considers London to be its capital, is keen on retaining its ‘passporting rights’ - the right for a firm registered in the European Economic Area (EEA) to do business in any other EEA state without needing further authorization in each country. In fact, London has been the major focal point for this very reason – an English language capital city, ideally located between the Americas and Asia and acting as the gateway into Europe. Therefore, any indication of a ‘Hard Brexit’ – one which threatens to pull the UK out of the EU without any deal, is of a major concern for the City of London. The pound and the economy therefore are directly affected over this concern as businesses continue to operate over the period of uncertainty. The UK also faces an upward of £40 Billion Brexit ‘divorce bill’ payable to the EU, which adds another financial liability to the process.
Eurozone recovery at its finest
The European Central Bank’s (ECB) president Mario Draghi has expressed the bank’s confidence over the region’s recovery, noting that the momentum has been robust, as GDP has risen for 18 straight quarters. The central bank attributed the overall success this year to improved employment figures in the single bloc, while noting that inflation cannot be self-sustained at this juncture. Mr Draghi used these comments to express interest and possibility for extending the timeline of the slowdown of its bond-buying program, which is slated to start from January 2018.
While the recovery has been robust, the ECB also recognises that it is vital for member states to continue a stable political and economic structure within, and reinforce each of their fiscal structures in order by focusing on both, keeping a buffer rainy-day fund while also working towards reducing debt. While these are words of wisdom for the future, Mr Draghi would also be thankful for the past year as Eurozone mitigated the rise of far right into leadership, especially in France, Netherlands and Germany – the three key powerhouses in the EU. The economy therefore was well protected this year.
10 Years of the Financial Crash
2017 also marked the 10 years of the great financial crisis of 2008 in October, which had sent the risk assets across global stock markets and economies tumbling. The ten years since the financial crisis of 2007-08 has passed quickly and on a better note than anyone could have expected at that point of time. From the collapse of Lehman brothers in 2008 to the arrests of Irish bankers in 2016, the 2008 depression had brought in a wider understanding of the fragile western economic ecosystems. The crash was a serious wake-up call for governments across the world, thus paving way for bringing in regulatory responses to the banking practices - such as the expansion of government regulation, scrutinised lending practices, and tougher stress tests to make sure they can withstand severe downturns.
The financial crash of 2008 provided a learning opportunity to set things right, and our economic mechanisms today have certainly implemented checks and balances to be more cautious in their functionality. If the crash has taught us anything, it is that complacency can be catastrophic.
It has certainly been an interesting year, and 2018 holds more opportunities for us than ever before to learn and grow.
After a night of counting the votes, it was revealed at exactly 06:00 BST this morning that Britain had voted to leave the EU. Prime Minister David Cameron has announced that he is stepping down by October, saying:
“I fought this campaign in the only way I know how – which is to say directly and passionately what I think and feel- head, heart and soul. I held nothing back. I was absolutely clear about my belief that Britain is stronger, safer and better off inside the European Union. And I made clear that the Referendum was about this and this alone – not the future of any single politician, including myself. But the British people have made a very clear decision to take a different path. And as such, I think that the country requires fresh leadership to take it in this direction. “
The referendum has seen the highest turnout at a UK-wide vote since 1992 – 71.8% with more than 30 million people voting. 51.9 % of those voted to Leave by 48.1%. While England and Wales voted strongly for Britain to leave the EU, London, Scotland and Northern Ireland strongly disagreed with Brexit.
UKIP Leader Nigel Farage, who has been campaigning for Britain to leave the EU in the past two decades, said that today would “go down in history as our independence day”.
As the UK heads for Brexit, the pound has fallen dramatically hitting a 30-year low and plummeting to $1.3236 at one stage earlier this morning. In the opening minutes of trade, the FTSE 100 Index fell more than 500 points before regaining some ground.
Laith Khalaf, Senior Analyst at Hargreaves Lansdown comments: ‘Global stock markets have taken a Brexit hit, with European markets actually falling more than the Footsie. Safe haven assets have soared as investors sought security, with gold rising 5% and UK bond yields plunging to historic lows.On the stock market, banks and housebuilders have been hit particularly hard this morning as markets try to factor in the Brexit effect on the UK economy.Sterling has fallen to its lowest level for over 30 years , which will mean holidaymakers heading abroad in the coming weeks will have to dig extra deep to buy foreign currency.Investors should carefully consider their plans and avoid a knee-jerk reaction. The coming days are likely to be choppy on the stock market as it digests the ramifications of Brexit, and further falls are possible.However markets will bounce back at some point, and investors who switch to cash risk buying back into the market at a higher level, and ending up in a worse position than if they had just stayed put.’
Bank of England governor Mark Carney said this morning that: "Some market and economic volatility can be expected as this process unfold. But we are well prepared for this. The Treasury and the Bank of England have engaged in extensive contingency planning and the Chancellor and I have been in close contact, including through the night and this morning.
"The Bank will not hesitate to take additional measures as required as markets adjust and the UK economy moves forward."
As the Article 50 two-year deadline approaches following the referendum results, David Cameron will be put under pressure to "steady the ship" over the coming weeks. Remain campaigners believe that it is possible that the Brexit could result in reverting to trading with the EU under World Trade Organization rules, which would involve exporters being hit by import taxes or tariffs.
After all 32 local authority areas in Scotland returned majorities for Remain, Scotland's First Minister Nicola Sturgeon has said that the referendum results make it “clear that the people of Scotland see their future as part of the European Union".
Germany's foreign minister Frank Walter Steinmeier commented that today is "a sad day for Europe and Great Britain".
