Global financial turmoil

posted October 12, 2018 at 12:50 am
Global stocks markets led by Wall Street plunged Thursday, presaging a possible slowdown in the world economy. 

The ordinary layman may not quickly comprehend the connection between the developments in the global financial markets and the local economy. To sum it up, however, a weak or falling stock market implies reduced corporate profits, or even losses, as rationally perceived by investors, which in turn, mean lower factory production or canceled expansion plans, and the loss of jobs or decreased employment opportunities.

The global economy, if the market meltdown is widespread, will slow down, resulting in lower demand for exports, tourism receipts and possibly remittances from migrant Filipino workers. The goal to reduce poverty incidence, especially in a developing nation like the Philippines, becomes more challenging.

The series of interest rate hikes by the US Federal Reserve Board has strengthened the US dollar and unfortunately weakened other currencies, especially those from emerging economies like the Philippines. A weaker exchange rate makes the peso and exports competitive, assuming there is demand in their market destinations. But a depreciated peso is inflationary in the form of higher cost of imported crude oil and other purchases from abroad, such as capital goods and equipment, food and medicine.

The US central bank is raising interest rates in a classic response to rising inflation and in a move to prevent the economy from overheating. Policy makers resort to increasing the interest rates to restrict money supply circulating in the financial system and depress economic demand.

The US Fed response, however, made investing in US debt instruments such as bonds more attractive. Global fund managers, sensing more lucrative yields in US Treasuries, are dumping stocks from the emerging markets and shifting to US bonds. The stock market sell-offs raised the demand for the US dollar and weakened other currencies like the peso.

Wall Street led the market rout after running a long winning streak. The trade war between the US and China and surging crude prices, meanwhile, have further unsettled financial markets. The global financial turmoil may not easily go away. The Philippines and the rest of Asia will have to bear the bumpy ride.

READ: PH, global stock markets slump

Topics: Editorial , Global financial turmoil , Global stocks markets , Wall Street , world economy
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