Tag Archives: World Recession

Global protests gaining attention in financial markets

Global protests gaining attention in financial markets
By Marc Jones and Mike Dolan

LONDON (Reuters) – An alarming spread of street protests and civil unrest across the world in recent weeks looms large on the radar of financial markets, with investors wary the resulting pressures on stretched government finances will be one of many consequences.

Money managers and risk analysts seeking a common thread between often unconnected sources of popular anger – in Hong Kong, Beirut, Cairo, Santiago and beyond – reckon the unrest is particularly worrying following years of modest global economic growth and relatively low joblessness.

If, as many fear, the world is slipping back into its first recession in more than a decade, then the root causes of restive streets will only deepen and force embattled governments to loosen purse strings further to fund better employment, education, healthcare and other services to placate them.

Forced fiscal loosening in a world already swamped with debt and heading into another downturn may unnerve creditors and bond holders, especially those holding government debt as an insurance against recession and a haven from volatility.

“Protests per se are unpredictable for investors by definition and fit a pattern of rising political risks that have affected market perceptions in almost all geographies,” said Standard Chartered Bank strategist Philippe Dauba-Pantanacce.

“Investors will get more nervous when they see that a country’s IMF package or investment promises are conditioned on fiscal consolidation and that the first austerity measures are followed by massive protests.”

More broadly popular pushback against debt reduction and austerity raises serious questions about how still-mushrooming debt loads can be sustained, even after the massive central bank intervention to underwrite it in recent years.

Many also fear the feedback loop.

According to the International Monetary Fund this month, a global downturn half as severe as the one spurred by the last financial crisis in 2007-9 would result in $19 trillion of corporate debt being considered “at risk” – defined as debt from firms whose earnings would not cover the cost of their interest payments let alone pay off the original debt.

Rising bankruptcies at so-called “zombie” firms would, in turn, risk spurring rising job losses and yet more unrest.

Marc Ostwald, global strategist at ADM Investor Services, said he saw many of the protests as ‘straws that break the camel’s back’ – tipping points in a broad swathe of long-standing complaints about inequality, corruption and oppression, variations on the broader themes of populism and anti-globalization.

But Ostwald said there was a worry for financial markets who have surfed rising debt piles for years thanks to central bank money printing and bond buying.

“At some point the smothering impact of QE (quantitative easing) will run its course,” Ostwald said.

“And as many of the zombie companies then go to the wall, so governments will face rising unemployment and desperately need to borrow money to prop up their economies – particularly as social unrest rises, as we are witnessing.”

Of the dozens of protest movements that have emerged in recent years, here are some of the most prominent ones.

HONG KONG

Hong Kong has been battered by five months of often violent protests after the city state tried to bring in legislation that would have allowed extraditions to mainland China. The plan has been formally withdrawn but it is unlikely to end the unrest as it meets only one of five demands pro-democracy protesters have.

On Tuesday, authorities announced HK$2 billion ($255 million) relief measures for the city’s economy, particularly in its transport, tourism and retail industries. It followed a more sizeable HK$19.1 billion ($2.4 billion) package in August to support the underprivileged and businesses. Hong Kong’s Financial Secretary has also said more assistance will be given if needed.

The Hang Seng, one of Asia’s most prominent share markets, is down 12% since the protests started and although it has been recovered some ground over the last two months, it has continued to lag other major markets.

LEBANON

Hundreds of thousands of people have been flooding the streets for nearly two weeks, furious at a political class they accuse of pushing the economy to the point of collapse.

Prime Minister Saad al-Hariri announced on Monday a symbolic halving of the salaries of ministers and lawmakers, as well as steps toward implementing long-delayed measures vital to fixing the finances of the heavily indebted state.

Markets are increasingly worried it will all end in default. The government’s bonds are now selling at a 40% discount and Credit Default Swaps, which investor use as insurance against those risks, have soared.

IRAQ

Similar factors were behind deadly civil unrest in Iraq which flared in early October. More than 100 people died in violent protests across a country where many Iraqis, especially young people, felt they had seen few economic benefits since Islamic State militants were defeated in 2017.

The government responded with a 17-point plan to increase subsidized housing for the poor, stipends for the unemployed and training programs and small loans initiatives for unemployed youth.

 

EXTINCTION REBELLION

This London-bred movement is pushing for political, economic and social changes to avert the worst devastation of climate change. XR protesters began blockading streets and occupying prominent public spaces late last year, and following 11 days of back-to-back protests in April the UK government symbolically declared a climate “emergency”.

The movement is developing alongside the growing FridaysForFuture led by Swedish teenager Greta Thunberg which sees school children boycott lessons on Fridays.

It has been particularly strong in Germany and the government there recently launched the ‘Gruene Null’ or ‘Green Zero’ policy which specifies that any spending that pushes the government’s budget into deficit must be on climate-focused investments.

Incoming European Commission chief, Ursula von der Leyen, has also introduced an ambitious “European Green Deal” which would include the support of 1 trillion euros ($1.11 trillion) in sustainable investments across the bloc.

Amazon <AMZN.O> Chief Executive Officer Jeff Bezos last month pledged to make the largest U.S. e-commerce company net carbon neutral by 2040.

CHILE

At least 15 people have died in Chile’s protests which started over a hike in public transport costs but have grown to reflect simmering anger over intense economic inequality as well as costly health, education and pension systems seen by many as inadequate.

Chile’s President Sebastian Pinera announced an ambitious raft of measures on Tuesday aimed at quelling the unrest, including with a guaranteed minimum wage, a hike in the state pension offering and the stabilization of electricity costs.

ECUADOR

Violent protests at the start of October forced Ecuadorean President Lenin Moreno to scrap his own law to cut expensive fuel subsidies that have been in place for four decades.

The government had estimated the cuts would have freed up nearly $1.5 billion per year in the government budget, helping to shrink the fiscal deficit as part of a $4.2 billion IMF loan deal Moreno had signed.

BOLIVIA

Mass protests and marches broke out in Bolivia this week after the opposition said counting in the country’s presidential election at the weekend was rigged in favor of current leader Evo Morales.

The unrest – already the severest test of Morales’ rule since he came to power in 2006 – could spread if his declaration of outright victory is confirmed, after monitors, foreign governments and the opposition called for a second-round vote.

EGYPT

Protests against President Abdel Fattah al-Sisi broke out in Cairo and other cities in September following online calls for demonstrations against alleged government corruption, as well as recent austerity-focused measures.

Protests are rare under the former army chief and about 3,400 people have been arrested since the protests began, including about 300 who have since been released, according to the Egyptian Commission for Rights and Freedoms, an independent body.

The country’s main stock market <.EGX30> dropped 10% over three days as the protests kicked off although it has since recovered over half of that ground.

FRANCE

The Gilets Jaunes movement named after the fluorescent yellow safety vests that all French motorists must carry began a year ago to oppose fuel tax increases, but quickly morphed into a broader backlash against President Emmanuel Macron’s government, rising economic inequality and climate change.

Macron swiftly reversed the tax hikes and announced a swathe of other measures worth more than 10 billion euros ($11.3 billion) to boost the purchasing power of lower-income voters. That was followed up with another 5 billion euro package of tax cuts in April.

ARAB SPRING

Beginning in late 2010, anti-government protests roiled Tunisia. By early 2011 they had spread into what became known as the Arab Spring wave of protests and uprisings which ended up toppling not only Tunisia’s leader but Egypt, Libya, and Yemen’s too. The Arab Spring uprisings in Syria developed into a civil war that continues to be waged today.

ETHIOPIA

A total of 16 people have been killed in at least four cities since fierce clashes broke out on Wednesday against the reformist policies of Nobel Prize-winning Prime Minister Abiy Ahmed.

The greater freedoms that those policies bring have unleashed long-repressed tensions between Ethiopia’s many ethnic groups as local politicians claim more resources, power and land for their own regions. Ethiopia is due to hold elections next year.

(Reporting by Marc Jones and Mike Dolan, additional reporting by Karin Strohecker in London and Mitra Taj in La Paz; Editing by Sonya Hepinstall)

Market tailspin hastens the economic shock it fears

LONDON (Reuters) – One of the biggest worries about this month’s sudden seizure in world markets is how puzzled investors have been left by it, and how many are just wishing it away as a temporary blip.

History suggests governments and central banks would do well to sit up and take notice, but with policy coordination at its lowest ebb in decades, a coherent response is unlikely.

With almost $6 trillion wiped off the value of global stock markets since the start of the year and another 25 percent off already low oil prices, there is a real risk investor anxiety itself will be the catalyst for a world recession.

And when market turbulence starts to crystallize the very problem investors are worried about — what wonks call a negative feedback loop — then these rare but dangerous spirals in confidence are notoriously difficult to halt.

By any measure, we are in historic territory.

Over the past 28 years — or 336 months — only 12 months have seen bigger losses in the MSCI World stock index than January 2016. Over half of those were associated with major market crises, including the Lehman Brothers bust of 2008-09, the dot.com implosion of 2001-02 and the emerging markets crash of the late 1990s.

Lowering the International Monetary Fund’s 2016 world growth forecast by another 0.2 percentage points to 3.4 percent this week, IMF chief economist Maurice Obstfeld said markets were reacting ‘very strongly’ to bits of evidence in a volatile, risk averse climate — but one where little fundamental had changed.

His predecessor Olivier Blanchard, now writing for Washington’s Peterson Institute, sympathizes with that view but warned against ignoring the seizure in markets.

“How much should we worry? This is where economics stops giving an answer,” Blanchard said.

“If … the stock market slump lasts longer or gets worse, it can become self-fulfilling. Low stock prices lasting for long lead to lower consumption, lower demand, and, potentially, to a recession.”

U.S. bank Morgan Stanley said on Tuesday it now sees a 20 percent chance of a 2016 world recession, as defined by sub-2.5 percent growth rate that is needed to keep pace with population gains.

FEAR ITSELF?

But why all the new year panic? Most economists blame a confluence of events rather than any sudden shock.

China’s deepening slowdown, pressure to devalue its yuan and its increasingly perplexing currency policy are all potential game-changers but have been building for months.

So too has the collapse in oil prices and other commodities, now more than 18 months old albeit a seemingly bottomless slide that is feeding off the China concerns.

These were joined last month by the first rise in U.S. interest rates in a decade which, by bolstering the already pumped-up U.S. dollar, has arguably exaggerated both the oil price fall and China’s yuan conundrum and capital flight.

Add to that potent mix the currency, commodity and interest rate pressures on emerging countries from Russia and Brazil to South Africa and the Gulf, an unwinding of these countries’ sovereign investments overseas, and investor flight from the equity and bonds of energy and mining companies.

Everyone can see a spiral forming, but few see where it ends. The threat of a major re-set of global market valuations amid high volatility is enough for many conservative investors to go to ground until it all plays out.

The now famous “sell (mostly) everything” note issued by Britain’s RBS last week was not a mere throwaway. It focused on the risk of markets snowballing as world trade and credit growth struggle, currency wars go up a gear and China and oil feed off each other. A 10-20 percent stock reversal was its best guess.

“The world is in trouble,” it said.

If so, where’s the cavalry?

By consensus, there appears to be about as much chance of a confidence-boosting grand economic policy agreement this year as there is of oil prices returning to $100 a barrel.

Coincidentally, China chairs the G20 group of world economic powers this year. Finance chiefs meet in Shanghai next month.

But internal dilemmas mean global coordination is likely to be low on Beijing’s priority list.

The U.S. Federal Reserve also paid little heed to international concerns when hiking rates last month, while Saudi Arabia has shown scant consideration for other oil exporters as it plays out a crude price war to protect market share against U.S. shale producers.

Germany has been at loggerheads with much of the rest of the euro zone and G7 partners for years over fiscal policy and austerity.

Harvard economist Jeffrey Frenkel notes that global economic cooperation has been stymied by international differences and domestic political divisions on policy, as well as growing disagreement between economists on how to model the world.

“When two players sit down at the board, they are unlikely to have a satisfactory game if one of them thinks they are playing checkers and the other thinks they are playing chess,” he wrote in a paper this month.

(Additional reporting by Jamie McGeever; Editing by Catherine Evans)