Are US indices pulling a global rout?

US stocks plummet, pulling much of the global indices down with them

Commodity trading also plummeted after Wall Street’s sudden decline this week [Xinhua]

Oil prices have continued into their third day of decline as US stocks plunge at the fastest rate since 2016.

The US benchmark West Texas intermediate dropped 0.76 per cent to $63.66 a barrel for March. Global benchmark Brent Crude fell 0.89 per cent for April to $67.02 a barrel.

On Monday, the Dow Jones Industrial Average plummeted, 1,175 points – or 4.60 per cent – erasing virtually a year’s worth of gains.

The S&P 500 Index followed suit with a 4.10 per cent drop, while the Nasdaq dropped 3.78 per cent.

The Dow, which had repeatedly broken records since the 2016 US election, had fallen more than 600 points on Friday.

Monday’s drop marks its worst performance since 2008, leading some to wonder if global markets are seeing the type of freefall which followed the sub-prime mortgage crisis 10 years ago.

That led to a financial crisis which the world economy is only now starting to recover from.

The sudden resurgence of volatility in American equity markets has rattled Asia and Europe as commodity trading has also been adversely affected.

The Japanese benchmark Nikkei stock index fell nearly 1,200 points – or 4.8 per cent – by the end of trading on Tuesday.

In China, the Hang Seng index fell 1,650 points for a 5.12 per cent drop, while the benchmark Shanghai Composite plummeted 3.35 per cent to 3,37065.

In Europe, the London benchmark FTSE 100 fell 1.58 per cent while across the channel the CAC 40 fell 1.45 per cent.

The pummeling of US stocks comes less than a week after US President Donald Trump praised his administration’s handling of the economy citing the upward trajectory of the stock exchanges in the past 15 months.

It also comes as the chairmanship of the Federal Reserve changes hands with Janet Yellen stepping down and Trump’s nominee Jerome H. Powell taking over.

The Fed was expected to vote to raise interest rates again during the Federal Open Market Committee (FOMC) in mid-March.

But traders and analysts are wondering whether the sell-off in US indices of the past few days will persuade the FOMC to postpone their decision to May 2.

In the last Fed policy meeting chaired by Yellen on January 31, interest rates remain unchanged.

Read More: Trump on Fed chair: Status quo vs radical shift

By Firas Al-Atraqchi with inputs from Agencies

The great Japanese bounce-back?

There are fears that the standoff between North Korea and the US could rattle Asian markets and derail Japan’s revitalized economy [Xinhua]

If Japanese Prime Minister Shinzo Abe is feeling smug about economic policy right now, he’s got the figures to back him up.

Second quarter GDP growth jumped a full 1.0 per cent in Q2 of the year to reach an annualized 4 per cent, a coup for his policies of raising value added taxes to boost income and stimulate the market.

The latest data beat forecasts of a gain of 0.6 per cent in Q2.

Strong domestic demand helped push industrial and manufacturing growth that contributed to the Q2 bounce. Domestic demand also pushed imports up.

According to official statistics, exports grew for the eighth consecutive month taking advantage of a weakened yen.

Japan’s Ministry of Finance said that exports had increased more than 13.4 per cent year on year, with exports to the US increasing 11.5 per cent from the same time last year.

The data help vindicate Abe’s economic policies, which came to be called Abenomics: focus on increasing government spending, monetary stimulus, and structural reforms.

But Abe’s position wasn’t enviable just 18 months ago. Just as Japan was moving to emerge from the global financial crisis, the nuclear disaster in Fukushima hit six years ago.

This forced the government to temporarily shut down all nuclear energy facilities pending a comprehensive safety review. Many have opened since then, but during their inoperation the government was then forced to resort to significantly increasing oil imports to meet its energy demands.

That inevitably led to a trade deficit just as flow of commodities worldwide was beginning to ebb, particularly due to capital outflow from emerging economies.

Abe was also facing strong opposition for pushing through his program to raise taxes to 8 per cent in 2014 as a means to boost income and stimulate the market (starting with weakening the yen currency to encourage exports) in the wake of dismal economic prospects at the end of 2013.

But the purposeful devaluation of the Japanese Yen had an almost adverse effect. The export market rose only by 0.5 per cent at the time, while imports jumped up by 3.4 per cent, mainly due to a slow growth in other Asian markets.

Enter the Bank of Japan

The BOJ felt the most effective approach was to lower interest rates and weaken the local currency.

That would encourage lending and keep the banks functional but also make Japanese wares and commodities appealing to global markets.

The central bank began fiscal and monetary expansion or qualitative and quantitative easing in hopes to boost the now ravaged economy.

The central bank promptly move to cut interest rates to 0 percent and below much in the vein of what the US Federal Reserve had done in 2009.

It also set an inflation target of 2 per cent.

In July 2017, citing worries about deflation and hoping to keep encouraging lending, the Bank of Japan by majority vote decided to keep interest rates steady at -0.1 per cent.

But it had already changed its fiscal stimulus targets.

It removed its quantitative easing target of 80 trillion yen ($780 billion) a year and instead said it would target 10-year interest rates to keep them at zero.

This new target, or yield curve control means it will buy as many long-term Japan Government bonds to ensure that their yields – or zero rate target – is met.

But some in the G20 have accused the BoJ of manipulating currency markets by intervening to keep the Japanese yen weak to boost exports.

Some have even threatened a currency war. Japanese officials fired back saying the BoJ adopted monetary policy to ease deflation and rejected accusations of currency manipulation.

Year on year, the yen has weakened nine per cent against the dollar. During the same period, the benchmark Nikkei index grew 16 per cent.

But on Monday, it fell to its lowest level since May 2 on fears of increased tensions between North Korea and the US.

By Firas Al-Atraqchi for The BRICS Post with inputs from Agencies