I maintain the view that while the sell-off in China yesterday was on the severe side of the scale, we also need to step back and consider that the market was probably playing “catch up” to the previous week-long public holiday. Therefore, I am not heavily concerned at this point that a stock market meltdown or crash could be upon us, but will instead continue to monitor movements and evaluate different elements of financial market risk as they come through.
One of the reasons why investors get so nervous about stock market sell-offs like the one experienced from yesterday is because the current market environment is very unpredictable and anxiety is high over the next potential financial market crash. One of the core issues of today is that the financial markets are becoming more and more influenced by political risk. It is not possible to predict politics and this is what investors are finding challenging in the current era of populism and protectionism.
Unknowns around areas like trade uncertainties are also a major contributing factor behind the IMF downgrading its global growth forecast for the first time in two years. This of course doesn’t make for a great headline and especially when the IMF clearly highlighted concerns on the possibility of the world economy plateauing, along with stresses in emerging markets.
What we can prepare for, however, is the increased likelihood that there is more pain ahead for emerging market currencies. I am not going to say that there is no way back, however, it is obvious that they collectively remain on a very bumpy road despite this being the case for at least the last three months.
The woes for emerging market FX stretch across the globe, but I am paying more attention now towards what could happen with developing Asian markets in comparison to the emerging markets of Turkey and South Africa as examples.
A risk that should not be discounted is what is happening in Pakistan after its Finance Minister announced yesterday that the Pakistan government would approach the IMF for a bailout. The Pakistani Rupee declined about 7% on this development and while the Pakistani Rupee has suffered heavily due to financial stresses throughout 2018, we should be aware regarding potential contagion threats after what happened with the Argentine Peso a few weeks back.