Black swans are flying about in global financial markets, with the problem whether the United Kingdom (UK) will leave European Union (EU) looming large.Scary tumbles in the stock and foreign exchange (forex) markets seen in the beginning of this year now happen again. Stock markets in Asia were sharply down about 2% yesterday, with Hong Kong's Hang Seng Index diving over 500 points. On the other hand, exchange rates of the US dollar made strong gains, with the British pound dropping to its low in two months. Investors dumped risk assets to buy in gold and sovereign debts. As a result, the yields on European and Asian sovereign bonds dropped to historical lows or even to the negative area, but they were still chased after by investors and seen as safe assets. From this it can be seen how panic the markets are.
Since the start of this year, shock waves in global financial markets come one after another. This underlines the fact that world economic recovery remains feeble, and there are still various uncertain factors. Downward pressure on economic growth is indeed greater than expected. More importantly, unexpected black swan events happen from time to time, hurting investors'confidence once and again.As a result, market sentiment fluctuates sharply, which is the source of the steady and sharp fluctuation in global financial markets.
The UK will vote in a referendum next week on whether it should remain in the EU. If the "Eurosceptics" really win out and the UK formally pull out of EU, then this would perhaps be this year's most scary and destructive black swan event. For, this surely will trigger a chain reaction for the Eurozone to face a crisis of disintegration.
However, given that the UK is a global financial hub and the world's largest US dollar offshore market, and the British pound is an international reserve currency, the price for the UK to leave EU is really too heavy. Even if it could successfully get rid of the EU shackles, it would lose its status as an international financial hub built up with arduous efforts over past many years. Also in return, the UK would have to taste the bitter fruits of the sharp devaluation of the British pound, sharp drops in UK stock and property markets and economic recession. The always down-to-earth British voters are certainly well aware of the gains and losses.
Although Eurosceptics who support the UK to leave EU now surpass EU supporters in popularity polls, leaving them behind farther and farther. However, results of polls must not be taken too seriously.The actual outcome may be quite contrary to what opinion polls predict, as seen in the earlier referendum on whether Scotland should be an independent country. In fact, if global stock and forex markets continue to tumble sharply this week, it would to a certain degree increase the chance for EU supporters to win out in the referendum next week.
Whatever, the UK referendum on whether to leave the EU is seen as the biggest risk source to trouble global financial markets in the short term.It is very normal for investors to rush to cash out risk assets against losses.For one thing, political and economic stability of whole Europe is at stake, and for another market sentiment remains fragile and confidence weak. So much so that investors have for long become like frightened birds that would be startled by the mere twang of a bow-string.
Apart from the UK referendum on its EU membership, the crisis of Japanese yen and Japanese bonds is also a potential black swan event to affect global financial markets. In fact, the Japanese economy has been at a loss for over 20 years. Given that there is no clear sigh showing a real economic recovery, Abenomics has basically already ended up in failure, which thought that a sharp devaluation of yen could combat against recession.
Moreover, Japan's central bank has already launched negative interest rates so that the room for its monetary policy manoeuvring in future is very limited and Japanese economic outlooks are worrisome. But with a lot of short covering buy-ins, the exchange rate of Japanese yen against the US dollar has jumped up 13% this year, even rising to 105 yen against one US dollar yesterday - a record high in two years. Even the proposed increase in consumption tax is postponed, a strong yen could as well drag down on Japanese economy. And the trend in yen's exchange rate diverges against economic performance, creating a potential big crisis, that is, Japanese yen and bonds may go down disorderly.
The current global financial markets become crisis-ridden, and international financial crocodiles are casting a greedy eye like sharks smelling of blood. Stock and forex markets seem to have entered a new period of turbulence.
14 June 2016
