Stock markets, cryptos could fundamentally change amid instability

Stagnation and the shadow of inflation in the world’s major economies continue to fundamentally change global markets, according to Bloomberg News.

Some worry that if interest rates rise, emerging markets will begin to decline, similar to what happened in the US markets.

Political crises also play an important role in determining the outlook of global markets, ranging from tensions in Europe, to the threat of ultra-nationalists, and conflict between China and Taiwan.

The outlook for the coming year is uncertain. One must wait and see to see which of these scenarios will ultimately affect the global economy.

Stock market and crypto volatility

A dramatic sell-off in Bitcoin and other cryptocurrencies has outpaced a marked retreat in the US stock market, as the Federal Reserve’s pivot from emergency support spooks investors who piled into high-flying but risky assets during the pandemic.

The downward momentum in equities was fuelled by escalating worries around monetary policy as the Federal Reserve led by Chair Jerome Powell looks to intervene on rising inflation levels more aggressively than previously anticipated with tighter policy and rate hikes.

As prices in the US are rising at their fastest rate in almost 40 years, the Fed, which is under pressure to rein in inflation, did not raise interest rates from their 0 to 0.25 percent range at its January Federal Open Market Committee meeting, but said such a move “will soon be appropriate.”

The price of Bitcoin, the most traded cryptocurrency, has fallen from its November highs of nearly $70,000 to around $35,000. Since the start of the year, it has fallen around 23 percent. Meanwhile, Ethereum, the second-largest cryptocurrency, fared even worse, falling roughly 35 percent since the new year.

The steep declines have been correlated to selling seen in higher risk assets, such as technology stocks, as investors prepare for higher interest rates and tighter monetary policy from the Fed.

COVID-19 concerns continue

As the COVID-19 variant omicron triggers stricter restrictions on economic activities and the movement of people, it has become increasingly clear that the road to vaccine-induced immunity will face more potholes.

Policymakers have faced a very complex task in simultaneously improving public health, restoring normal economic and social interaction, and respecting individual freedom. They now need to accept greater challenges. This may once again lead to a global economic recession.

Given the new COVID-19 variant, governments have spent huge sums of money to protect workers and maintain jobs, but austerity policies seem to be controlling inflation — this situation will also increase the chances of a post-pandemic economic recession.

Inflation is a supplement to the decline in employment and production, it reduces the purchasing power of American households. Although Fed officials have been saying that inflation is temporary for months, it has become clear that inflation is still moving upwards and breaking records.

Given the return of inflation and the growth of major financial market indicators and concerns about bubbles, people are worried that the Fed will again pursue austerity policies.

After two years of expansive policies, this is not surprising. The logical result of such measures will be a recession in 2023.

Interest rate hikes will boost the dollar’s strength, but for the world’s emerging economies this may be a nightmare. As the dollar strengthens, capital outflows from emerging markets will increase. This sometimes leads to currency crises in these countries.

Europe descends into turmoil

France and Italy are heading to the polls, and the rise of nationalists who are pessimistic about EU policy may destabilize this part of the world. Also, the failure of the UK-EU trade negotiations could lead to a full-scale trade war — import tariffs could lead to price increases.

Food prices and turbulence

Hunger is a historical factor in social movements. Severe weather and the crisis triggered by COVID-19 have combined to increase food prices across the global market. The collapse in food prices in 2011 triggered a wave of public protests in the Middle East.

Turmoil in Taiwan

The world is still threatened by war. The escalating tension between China and
Taiwan may evolve into a showdown
between the great powers and evolve into another war, although admittedly this is a worst-case scenario.

Other circumstances pose a threat to the global economy. For example, Taiwan’s semiconductor production has fallen, and these parts are essential in the production of many things from cars to mobile phones.

Optimistic road map of 2022

The fiscal policy of the US may be more expansionary than it currently seems. This keeps the economy away from the edge of financial stagnation and promotes global growth.

Many households hold extra cash due to stimulus packages handed out by governments during the pandemic and forced savings during quarantines, if these savings are spent faster than expected they will boost economies. But Chinese economic growth may accelerate.

Investing in green energy and affordable housing may fundamentally change global investment.

US, China, Russia tensions

No global structure of peace can be stable and secure unless all parties recognize the legitimate security interests of others.

The best way for the major powers to begin to achieve that is to choose the path of mutual understanding and de-escalation over Ukraine and Taiwan.

China, Russia and the US are inseparable parts of the same puzzle, where close cooperation between the three on the global stage guarantees durable peace and stability for the rest of the world.

Military confrontation between the US, China and Russia is likely to happen in low-profile skirmishes in buffer states, and given the circumstances, an outbreak of a full-scale nuclear war is highly unlikely. Rhetoric will be limited to imposing occasional economic restraints and sanctions on each other.

• Nasser Alshareef is head of Business Administration Department and Faculty Vice Dean for Quality and Development at Majmaah University.