I am not alone in this view. My former Far Eastern Economic Review colleague Christopher Wood (now the global head of equity strategy at investment bank Jefferies) observed in a note to clients that the financial media continue to focus on the “endless chatter” around the US Federal Reserve.
Yet this pales into insignificance compared with the “tectonic shifts” happening in geopolitics. Financial markets, Wood suggested, are useless when it comes to discounting such shifts – until, that is, they become impossible to ignore.
I cannot but agree and, even within a more restricted framework of reference, many analysts have been found wanting lately on economics and financial developments.
They declared that the most recent bout of inflation would be “transitory”, which it wasn’t. And they suggested that consequent interest rate rises would be short-lived, which they weren’t.
Now, they are speculating that rates will stay higher for longer, which they almost certainly won’t. In any case, it matters little in the broader scheme of things compared to where stock markets and capital flows go from here.
This often overlooked fact is worth recalling at a time when the market has become so big in relation to the world’s largest economy, and when the quality and composition of some listings could be questioned.
With Mideast on brink, investors ignore geopolitical risks at their peril
With Mideast on brink, investors ignore geopolitical risks at their peril
The New York Stock Exchange and Nasdaq are jointly capitalised at around US$50 trillion as of last year. Astonishingly, this is equal to more than 170 per cent of US gross domestic product.
The leveraging potential of this massive money machine for US consumption of imported and domestically produced goods and services is vast, not to mention the boost to spending and investment created by the wealth effect from stock prices.
Markets need to watch what is happening to US stock indices with the same laserlike intensity they have been devoting to the fluctuations of inflation and interest rates. Where US stock prices go, there too goes the global economy.
03:47
World leaders call for de-escalation after Iran launches air attack on Israel
World leaders call for de-escalation after Iran launches air attack on Israel
If – or more likely when – the stock market stumble turns into a continuing slide and when the slowing US GDP growth seen in the first quarter of 2024 becomes a trend rather than a slip, the Biden administration might reach for fiscal and monetary stimulus levers, Fed objections notwithstanding.
Stocks prices in general can be expected to turn volatile at that point, although with the size of markets outside the US much smaller in relation to GDP (for example, China’s market capitalisation is about 60 per cent of GDP, according to CEIC Data), the impact on economies other than the US will be more muted.
Will India’s economy continue to benefit from China’s own goals?
Will India’s economy continue to benefit from China’s own goals?
Recent readings of the US market have not been encouraging. After reaching all-time highs in March, prices retreated in April and have generally been giving an appearance of wobbliness. They have a “stale bull market” look to them.
This has thrown commentators back to their obsession with interest rates and inflation instead of directing their attention to faltering US GDP growth and nervousness over the tech-dominated nature of the stock market.
Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs