In this video, we’re going to talk about the fundamental perspective of what’s happening in the markets right now.
So the best way to understand current events, is to put them into the context of the big picture. And for that, we’ll go back to the U.S. housing crisis that led to a global financial crisis in 2008.
During the crisis, the U.S. Central Bank, the Federal Reserve, commenced some (on hindsight) pretty impressive financial judo moves. They aggressively cut interest rates and carried out 3 rounds of quantitative easing and as the global and local economies began to show signs of improvement, they tapered off the easing, and now the global narrative is “back to growth”.
But the situation is not really that simple, as we will see later on.
Let’s first begin with what’s happening in the U.S.
We’ve already covered most of this, and over the past few months the U.S. economy seemed to be one of the few that was back on the path to growth. And this led to an increasing number of people who began to think that the Federal Reserve would be raising interest rates this June.
But more recently, growth in the U.S. economy is once again slowing down, and expectations of a rate hike has been pushed back to September. And if the economy does not improve further, we might not even see a rate hike this year.
So the major theme with regard to the U.S. dollar right now is: when will the Federal Reserve raise interest rates? That’s what everyone is concerned about with regards to the USD.
Let’s next take a look at the Euro.
The Eurozone went through a sovereign debt crisis in 2009, and has since then been struggling to maintain positive growth. But with continued affirmation from the ECB — that’s the European Central Bank –, and more recently with their own version of quantitative easing, growth has started to pick up.
But growth in this region is still at a relatively low level, so they are certainly not out of the woods just yet… and right now the main theme for the Euro is all about the potential of a Greek exit.
Greece continues to suffer from debt problems and the pressure is now mounting. If their debt problems are not solved, Greece will probably have to leave the Eurozone.
Now the problem with Greece leaving is that no one knows exactly what will happen if they leave. Some people think this is not too much of a problem because Greece is (relatively speaking) a small country, but some other people think that if Greece leaves the Eurozone, there would be some knock-on effects that will eventually lead to the collapse of the Euro.
Between these two extremes, opinions can vary widely.
So the situation with the Greek exit is now getting more and more tense, and I think we will probably see a conclusion somewhere in the next few months or so.
A lot of people are speculating about what’s happening, about whether Greece will leave, and whether, if they leave, the Euro will be as resilient as it has been so far.
So that’s it for the Eurozone.
Let’s next move to the far east, where we’ll take a look at Japan.
During the global financial crisis, the Japanese economy was hit pretty hard, and like many other countries they carried out an aggressive quantitative easing program. But since then, growth has not managed to stick in Japan… and in recent times, it has actually been weakening.
The thing with Japan right now is that most of the global attention is right now on the U.S. dollar, the Euro and the Canadian dollar, so attention on the Japanese Yen has taken a back seat. No one is really looking at the Japanese Yen right now. It is not being driven by any particular fundamental drivers. The global economy is generally more interested in what’s happening in the U.S., the Eurozone, and Canada, at this point in time.
Next, let’s look at the United Kingdom.
Like all other countries, the U.K. carried out aggressive monetary policies in reaction to the 2008 crisis, and so far they mostly been able to maintain some growth, but in recent times that growth has started to weaken.
This said, the main theme for this market right now is about the persistently decreasing inflation rate. In fact, in the past 2 months the inflation rate in the U.K. has been zero.
A lot of people are concerned about this low inflation rate in the U.K.
Next let’s take a look at Canada.
Compared to many other countries, Canada actually did relatively OK during the financial crisis… but in the recent months we have been seeing some weakening growth, and that’s because of a rapidly falling oil price. The oil price has collapsed very significantly, and generally speaking, the lower the price of oil, the worse the Canadian economy does.
So the main theme right now for the Canadian dollar is all about low oil prices.
But in recent weeks, the oil price has started to pick up a little bit, and now some people are thinking that it will only continue to rally from here. We don’t know what’s going to happen right now… oil prices are still relatively low, but they look to be picking up in the past few weeks.
Next, let’s take a look at Australia.
Like Canada, Australia did relatively OK during and after the financial crisis, but is right now undergoing low growth. As a major exporter to China, the health of the Chinese economy is one of the most significant concerns of Australia, and in recent months the Chinese economy, although still going strong, is now slowing down.
So the main theme in this economy right now is the outlook of the Chinese economy.
Last but not least, let’s take a look at New Zealand.
Like Canada and Australia, New Zealand did relatively well in spite of the financial crisis.
Unlike Canada and Australia though, it is one of the few countries that has maintained significant positive growth. This is generally good news for the New Zealand economy, and by extension, the New Zealand dollar… but recently the Central Bank governor has stated that he thinks the New Zealand dollar is right now at a relatively high level, and that it is unsustainable. I will cover this later on in a separate video where I will discuss the implications of central bank statements (video here).
With all this in mind, the general theme in the market right now is about growth. Coming out of the financial crisis, a number of economies started to post positive growth numbers, but that growth has not managed to stick, and now we are seeing generally weak growth across the board.
So the question we have to ask ourselves is: is the financial crisis really over?
And the only way to find out the answer, is to look back on hindsight.
So for now, the story of the global economy continues, as traders and investors all over the world (like you and me) continue to watch the drama unfold.
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