Jul 5, 2016

Brexit + China Economic Slowdown = A Perfect Storm?



Truth to be told, I am not too concern about the direct potential fallout of the Brexit on the Singapore Economy. The greatest casualties of Brexit are perhaps the countries with significant exports to UK, which includes Germany, China and the Netherlands as a result of the sharp fall in Pounds, and a "saving for rainy day" mentality as the British prepares for a potential recession in the United Kingdom. However, I am concern that a slowing Chinese economy and the financial shock the Brexit will bring to the EU economy, may unleash a perfect storm.


One of the key factor for the slowing economy in China has been attributed to the European financial crisis which has seen the EU economy stuttering, limiting the amount of exports that EU is able to purchase from China. EU is currently China's largest trading partner. As a result, the Chinese government has been working hard for the past few years to stimulate the local consumption market to offset the sharp fall in exports to US and Europe. Just as when the world believes that the US and EU economies are kicking up a gear after years of stagnation, the Brexit came along and inflicted a serious set-back on the EU consumer confidence and potentially the economy. A renewed fall in economic growth in EU and a sharp devaluation of Pounds and Euro have put on extra burden on the Chinese government to quicken the pace to restructure their economy.

In the past few days, the China central bank has been quietly devaluing their Yuan as the Euro and Pound went into free fall as a result of the Brexit. The last time the Chinese central bank devalue the Yuan sharply, it led to the Black Monday of China with the Chinese stock market plunging into freefall from its bubble state.



Given that the political situation in UK has degraded into a "Games of Throne" bloody fight for political power, the government is in no position to put proper fiscal measures in place quickly to smooth the current crisis over. The EU central bank and Bank of England are also at the limits of their monetary easing with interest rates already in the negative region with little ammunition left to reverse the any drastic economic activity.

Quitters
 With the global market showing a strong post Brexit rebound, many may think that the danger is already over. The impact of the Brexit will not be felt until months later, as the EU consumers scale back on spending bracing for a recession and EU business restructure and scale back their investments until the front view is clearer. Meanwhile, China's latest manufacturing index data shows continual contraction and this data is pretty much glossed over at the world stays reverted at the political drama unfolding in United Kingdom.

In the past few years, the European economic crisis and the China economic slow-down has been rocking the markets at different junction of this 7 years global bull market but what will happen when both regions are engulfed in their financial storms at the same time?

It might well create the perfect storm that will inflict a death knell to the Bull market.



I have written much on why I feel so uncomfortable with the outcome of the Brexit and I am extremely worried for the financial markets in months to come. The recent stock market rebound is based on the optimistic expectation that the US, EU and China central bank will do more to keep the major economies humming along. However, recent interventions by central banks in Japan and EU has shown that any further monetary policies are not making any impact once interest rates have been shifted into the negative zone. Respected global macro investors around the world, including George Soros and Jim Rogers also predicting an imminent recession, with Soros shorting the equity market for the first time since 2007. From a technical analysis point of view, major markets in Europe and Asia has been making major lower low trends for the past 1 year. Given that there is so few positives in the market right now, any more economic shocks may send the global indices come tumbling down.

In this case, what are the safe havens should that happen? USD and Gold will be beneficiaries should the worse happens, but I am reluctant to shift to Gold at this moment in time as Gold has spiked up too much too fast and prefers the relatively much weaker USD. I am definitely interested to scope up some Gold fund should prices come down further as the market become calmer.

3 comments:

  1. Hi Xeo,

    My first time commenting and in fact first time visiting your blog.

    Lots of substance behind the articles you written!

    This is what we need in the blogosphere.

    :-)

    ReplyDelete
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