All markets have their own idiosyncrasies
As part of its plan for tax cuts, Britain’s new administration plans to make the largest cuts in taxation in half a century. In contrast to the global trend, Japan attempts to keep interest rates at rock-bottom levels. In China, authorities are fighting against global isolation caused by “zero-covid” coverage. There are, however, some challenges that they all share. There has been a marked weakening of most of the world’s currencies against the US dollar.
During the course of this year, the DXY, an index that measures the greenback’s price against a basket of six major currencies, has risen 18%, marking the highest level it has reached in almost 20 years. Markets are experiencing febrile conditions due to persistent inflation in America and tightening financial coverage.
Before the wild volatility in the financial markets, the Bank for International Settlements reported that monetary circumstances had changed since central bankers’ commitment to raising interest rates had been priced into the market and liquidity for American government bonds had deteriorated. Global shares have hit new lows after a quick and modest increase in August: MSCI’s All Country World Index (ACWI) is down 25% for 2022.
Stress is obvious elsewhere too
There has been a dramatic rise in the yields of American junk bonds over the past couple of months, with yields up 9%, nearly double what they were a year ago. Bloomberg reports that corporate bonds inside of investment grade high quality, rated BBB, produce nearly 6% yields, which is the most for 13 years based on Bloomberg’s analysis.A lot of company treasurers, traders, and finance ministries predict volatility. As a result, hedges are purchased, and plans are made accordingly. The current situation, however, has gone beyond anything that could have been expected. The majority of forecasters did not predict double-digit inflation in several global regions a year ago. As a result of poor market performance, policymakers are faced with a range of hazardous choices in response to problems.
Fed’s commitment to crushing inflation is clear
Jerome Powell, Fed chairman, said after the bank announced its latest rate hike on September 21st, that the chances of a smooth touchdown for the American financial system were diminishing, but that inflation would still be a priority for the institution. The Bank of America has conducted research showing that between 1980 and 2020, when inflation rose above 5% in wealthy countries, it typically took a median of ten years to fall back to 2% on average.We are likely to see a decline in global development expectations in the near future. According to the OECD’s September 23rd forecast, world GDP will rise by only 3% this year, down from the 4.5% projected in December. It is expected that the development in 2023 will be only 2.2%. This result will result in a decrease in the cost of commodities. In the next few weeks, Brent crude oil is expected to round $85 per barrel again, its lowest price since mid-January.
As of September 26th, copper prices on the London Metal Exchange had fallen to their lowest level in two months. As FedEx, a worldwide transport firm has recently warned of “global volume softness”, a weak world financial system can also cause corporations to downgrade their revenue forecasts. A rise in interest rates has been a pain for share prices and the same can also be said for a decrease in earnings.
Even weaker greenbacks might not be enough to disguise a slowdown. In times of economic downturn, the US dollar usually rises because traders seek the relative security of the worldwide reserve currency. It’s an ominous prospect for nations and firms all over the world.
Why the US dollar is a safe haven during an economic crisis?
Currency traders and investors often convert their cash holdings into so-called ‘safe haven’ currencies to protect themselves during volatile periods. Among the safe-haven assets in the global financial system are currencies such as the Swiss franc and the Japanese yen, but the US dollar is considered to be the most valuable.There are several advantages to using the US dollar, one of which is its role as the world’s reserve currency and the one used in many international business contracts. Besides that, it is also backed by one of the world’s largest reserves of gold. Compared to major rival currencies, the so-called ‘Greenback’ has recently reached its highest level in two decades. Due to signs that the US Federal Reserve is increasing interest rates faster than most, there has been a surge in demand for the US dollar among investors.
“With the US rate much higher and the stock market way down, I perceive the US dollar as a safe-haven trade,” explained Brent Donnelly, on Bloomberg’s website. “The US dollar is the only safe haven left,” he added to the statement.
Source: Financial markets are undergoing a dangerous new phase!
