When Fed hiked its rates in December 2015, it led to a massive sell-off in equities. From the lows of Feb 2016, the global market capitalization had grown from $60 trillion to nearly $100 trillion and the movement has been literally linear in the last 30 months. It is in this context that the recent correction in global stocks must be seen. The Dow and NASDAQ alone lost over $2 trillion during the week and this could just be the turning of the sentiments globally. What is the problem with global markets and what exactly has changed?
Fears of US slowdown
On Wednesday, the Dow Index fell by 2.41% while the NASDAQ fell by a whopping 4.67%. That is a huge fall on such a large base. While GDP growth is still sustaining at 3.5%, economists feel it is a matter of time before the lag effect of trade sanctions show up. Then there is the concern over the strong dollar. With the US economy robust and the Fed maintaining a hawkish policy, the dollar has been on an upward trend. This has put pressure on the earnings of some of the largest companies in the global tech sector like Apple, Amazon and Alphabet. All the marquee names are facing earnings pressure due to a strong dollar and due to a slowing Chinese economy. It is actually the technology stocks that are leading the US markets down. After all, the NASDAQ is quoting at a 50% value premium to peak levels touched in 1999.
Italy is the problem
European markets have been oscillating between doubt and hope. Things just got a little worse after the European Commission rejected the recent Italian budget and asked them to rework it. Such an event is rare in the EU and a lot would depend on Italy’s reaction. If they refuse the stringent austerity measures imposed by the EU, then they may be ejected from the Euro. With one of the largest debt burdens of nearly $2.27 trillion, this crisis could spill across the whole of Europe. That is because most of the Italian banks have a large exposure to Italian bonds and it could trigger a chain effect across markets. It is Italy’s finances which is bothering EU and the world markets.
China is slowing
Forget about GDP numbers, there is a real slowdown in China. The way the Chinese government is using all its might to prop up the economy, it is clear there is a real problem of a slowing economy. The GDP in the last quarter touched a post-Lehman low of 6.5%. That is what is reported and reality could be lower. Then there is the challenge of US sanctions which is queering the pitch. A weak China is bad news for Asia; both in terms of exports and in terms of the value of their currencies. That is the growth engine that the world is counting on. That is leading to the market panic! ©