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Brexit and Trump’s successful election surprise the market a lot. This year, “black swan” events frequently happen in the financial market. Along with the arriving constitutional referendum of Italy, the market concerns whether Italy will face a “black swan” event, like Brexit, and the exchange rate of Euro/U.S. dollar has suffered from the longest constant-decline period than ever before. On the other side, the Fed is expected for a certain rate hike in December, which will greatly hit the global economy, the market commonly believed.
Global economy faces big political risk
Italian Prime Minister Matteo Renzi recently reiterated that he will not continue his position, if the constitutional referendum of Italy is not passed through. Once Renzi leaves his position, Italy’s political status will certainly be more fluctuated, with its future just like the UK being influenced by Brexit.
It is 60 percent for Italy to fail in the said referendum, economist at Deutsche Bank AG indicated. While Eurasia Group, a political risk assessment consulting company, also changes its pre-assessment this month to a failure possibility of 55 percent.
On the other hand, European countries, such as Austria, Netherlands, France, Germany and etc., will hold elections in next one or two years, Italy and the UK are also likely to hold elections, and a wave of European election events are arriving. European crisis may cause much more serious impact than expectation, if the Brexit crisis, which is against global construction or globalization, also spreads to other European countries.
Recently, the yield ratios of European bonds, such as Italian, German and British bonds, have set new highs in the latest months one by one. The 10-yr Treasury Bond of Germany with the highest rating has increased around 17 base points in yield ratio this week, while such figures are nearly 25 base points for French and Italian 10-yr Treasury Bonds. The French Treasury Bond may achieve the highest single-week growth rate from June 2015 when government bonds in the Euro zone faced massive sell-offs.
Furthermore, changes of the political climate also trigger investors’ concern on foreign exchange and stock markets. In a week up to last Wednesday, the European stock market had suffered from outflow of 1.64 billion U.S. dollars, according to data of BofA Merrill Lynch. Rebounded sterling, which is a scapegoat for foreign exchange market in 2016, implies that market becomes increasingly concerned on types of European elections, some analysts also pointed out.
“People do not believe any longer that Brexit referendum is just a vote with surprised result, and it may be a start of Populism vote worldwide; therefore, Euro declines can be viewed as a sign that political risk premium has spread from the UK to the whole Europe”, based on Derek Halpenny, European director under global market research department at Bank of Tokyo-Mitsubishi UFJ.
Increasing expectation on Fed’s rate hike
Besides policy uncertainties in the Europe, the monetary policy trend of the U.S. also becomes a main factor to influence the global economy.
It is 90 percent possible to raise the rate in December, three rate hikes are expected in 2017, and the interest rate of federal fund will be from 1.25 to 1.50 percent at the end of next year, Goldman Sachs analysts believed.
Only the worst event can block the way of rate hike in December, like growth less than 100,000 positions for non-agricultural employment, according to Carnell, chief internal analyst of ING.
Trump’s successful election does not change the Fed’s “rapid pace” for rate hike, Yellen recently expressed. She also said, rate hike may happen soon. Based on probability indicator for Fed’s rate hike and futures data in the federal fund rate market, the probability of rate hike in December was 68.8 percent before Yellen’s statement, but soared to 90 percent after that.
“Black swan” events not bad for China
What impact of financial market fluctuation worldwide will have on China? “Black swan” events may be not bad for China, Shao Yu, assistant president and also chief economist at Orient Securities, indicated in a recent forum.
RMB has depreciated only around 1.1 percent since October, smallest decline rate worldwide, while the biggest depreciation rate is 9 percent for another currency, Shao pointed out. Main economies in the world face financial risk and crisis, just like a group of people swim in the sea with a shark; they may not be required to swim faster than the shark, but at least faster than the last slowest persons, and the UK and France are likely to be the slowest.
Fed’s rate hike as challenge for emerging economies
Regarding to impact on China’s economy from Fed’s rate hike attracting much market attention, Janet Henry, chief economist at HSBC, said that the U.S. dollar turning strong will be a challenge to emerging economies. Now people expect further recovery of the U.S. economy and faster pace for rate hike. Therefore, funds previously investing in emerging economies now flow in the U.S. dollar and its country. In this case, these emerging economies are hard or do not have space to continuously cut the rates to incent the economic growth.
For a short term, these uncertainties will influence the economic outlook and prospect of emerging economies, but the market may see how many policies Trump will truly carry out after his official assumption from January of 2017.
Under the background of more uncertainties in the financial market worldwide, enterprises closely linked with high-risky countries will face more challenges, and may be influenced to some extent, once those countries suffer from great currency depreciation or economic crisis, based on some analysis. There are mainly two ways to influence these enterprises: in terms of price simply, the revenue and delivery settled in domestic currency will reduce when foreign currencies depreciate, and losses caused by foreign exchange will increase to make profits decline; regarding to turnover, shrank demands will reduce the enterprises’ revenue, once foreign currencies depreciate to cause economic crisis or political fluctuation to some extent, and meanwhile, normal operations of enterprises in those countries will be possibly impacted to reduce the incomes or make early-stage investment suck in troubles.
(XINHUA FINANCE AGENCY)
