China has done it again. The preliminary Purchasing Managers’ Index, China’s manufacturing gauge has dived to 47.1, the lowest level for six years, stoking fears over the health of the world’s second largest economy. A reading below 50 indicates a contraction which triggered a sharp selloff across the Asian markets. Already battered Chinese stock market plummeted further 13% in a matter of two days erasing all the gains it has made this year.
Asia’s largest stock market, Japan sank nearly 6% in two days as Japan slipped back into recession and tension escalated between South and North Korea. Hong Kong entered into a bear market territory making equities cheaper than those of Pakistan on price to earning basis. European bourses also fell sharply and entered into a correction phase despite the economy gaining momentum. The broad base S&P Index in America tumbled the most in for the past four years, wiping off all the gains made this year. India and Brazil also tanked.
This global rout is a result of stresses that have been building in the markets for the past few months. China’s slowdown is turning out sharper than expected.
This global rout is a result of stresses that have been building in the markets for the past few months. China’s slowdown is turning out sharper than expected. Japan has slipped back into recession. Europe is struggling with Greece descending back into political uncertainty thanks to a snap election called by Mr Tsipras. Markets are also rattled by the possibility of the US Federal Reserve beginning to hike the interest rates after more than nine years. The smart money is flying out of the emerging markets and pouring back into the US Treasuries, considered as a safe haven. Bond market watchers are already warning of a bubble which could pop and trigger another financial crisis.
This reverse flow of money to the US Treasuries from the emerging markets, is going to raise the cost of capital in the emerging markets such as India and Brazil, which need the cheap capital to accelerated sagging economic growth. China fired its last salvo triggering a crisis by devaluing its currency. China’s surprise move didn’t do much for its currency, but it triggered a dominos effect in the currency market wrecking havoc with the currencies of developing countries including, Kazakhstan, Saudi Arabia, Nigeria, Turkey and Malaysia. Indian Rupee also came under pressure as well widening the yawning trade gap with China even further. Kazakh currency sank almost 23% creating panic in the central Asian markets.
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Fears of the China-led global slowdown and a rout in the global and Chinese stock markets are shaking the commodity markets as well. More than $2 trillion have been wiped off the commodities and the leading commodity exporters including, Saudi Arabia, Russia, Nigeria and Australia are under severe stress. Trillions of dollars were wiped off the stock markets around the world. Gold and silver have recovered this week but oil has hit the lowest level since the glut of 1988 and copper continues to fall.
Experts are also warning of the Real Estate bubbles in China, Europe and the US, where prices have risen to unsustainable levels.
Experts are also warning of the Real Estate bubbles in China, Europe and the US, where prices have risen to unsustainable levels. Corporate and private debts have risen again to unsustainable levels with China and Japan leading the league. Companies and individuals from China and Japan are most leveraged in the world with debt levels beyond 200% of the annual income. Debts beyond 70% of the revenue or income are considered unsustainable.
Stagnating growth, plummeting stock markets, glut in the commodity markets, currency war to gain competitiveness, unsustainable debt levels and geopolitical flashpoints appear to be converging together to create a perfect storm of a sharp correction. All this is happening as we approach the month of September which is statistically prone to market softness. Only a carefully calibrated and globally synchronised action could avoid another financial crisis.