By DAR Wong
Since late last year, I have emphasised over numerous investment conferences, seminars and media that the Euro debt crisis is likely to return some time during end 2018. Recently, the market has been speculating that Greece would implode under another debacle to repay its debt in June 2018.
The reason behind is the strengthening US Dollar and oil prices which are stoking the US inflation. This would give a good excuse for the Federal Reserve Chief Jerome Powell to hike the Fed fund rate, at least bringing it to the 2-percent benchmark by end of this year. Naturally, bond yield will begin to climb, setting mortgage loan cost on an upward trajectory.
US Dollar continues to rise while oil prices have risen and stabilised at around US$70/barrel. The culmination enabled US oil exporters to make a profit which bolsters the American economy. This was the motivation behind US President Trump’s withdrawal from the Paris Climate Treaty last August, followed by pulling out of Iran Nuclear deal in May this year. Consequently, what we are seeing is the rapid slowdown of emerging market economies like in some Latin countries while other oil exporting countries have seen their currencies depreciating quickly.
As most global funds begin to their flight back to the US, there erupts there are growing signs of cash shortage in the emerging economies as well as Eastern Europe. The current European economy as we all know is still under the Quantitative Easing policy since 2013. Despite the stimulus, the programme has failed to drive meaningful inflation growth while debt level of the 19 member countries kept ballooning. As a result, the European Central Bank (ECB) is currently unable to taper down when most member countries’ economy is still in doldrums.
On the hand, the US Fed has begun the credit tightening process since end 2015. It is not difficult to understand the agenda for normalising the interest rate is to give US policymakers some ammunition when another recession hits before year 2020! However, this has caused an indirect impact to the EU when the ECB fails to follow suit.
In late May, Italy has created some disarray in the market when it was announced that its national debt has reached US$4.2 trillion. Comparatively, investors were already uneasy with Greece is struggling with just US$570 billion worth of debts. Since March, Italy has not been able to form a new government only until recently. A last minute deal averted the threat of a new election that could have turned into a referendum that would decide whether Italy remains in the EU. Unfortunately, the crisis has already waivered investors’ confidence and as they abandoned the Italian Bonds!
There could be more ugly heads coming to be surfaced in following months as the Euro Dollar plunges to a strengthening US Dollar. Soon, other European countries in the EU like Germany, Spain, France and Eastern counterparts may need to reveal their debt level. Once again, the EU will be embroiled in a debt crisis and funds will begin to flow quickly back to US Dollar and other safe haven assets like major commodities.
This is the time to exit European equities and real estate properties. Ironically, some Asian markets are still immersed in frenzied speculation of property stocks. Nevertheless, we reckon that this could be the peak for asset prices. After a whole decade, the bull market might be fizzling out soon as the cost of borrowing is no longer cheap! You may choose to get out of the water or let the sharks eat you.
~ DAR Wong is a registered Fund Manager with 29 years of Financial market experiences on global basis. The expressions are solely at his own. He can be reached at firstname.lastname@example.org