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Thu Nov 21, 2019, 05:34 AM

Nine reasons why the stock markets are far too optimistic

https://www.theguardian.com/business/2019/nov/21/nine-reasons-why-the-stock-markets-are-far-too-optimistic

Nine reasons why the stock markets are far too optimistic

Nouriel Roubini

Thu 21 Nov 2019 10.14 GMT

This past May and August, escalations in the trade and technology conflict between the US and China rattled stock markets and pushed bond yields to historic lows. But that was then: since then, financial markets have once again become giddy. US and other equities are trending towards new highs, and there is even talk of a potential “melt-up” in equity values. The financial-market buzz has seized on the possibility of a “reflation trade”, in the hope that the recent global slowdown will be followed in 2020 by accelerating growth and firmer inflation (which helps profits and risky assets).
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Yet there is much to suggest that not all is well with the global economy. For starters, recent data from China, Germany, and Japan suggest that the slowdown is still ongoing, even if its pace has become less severe.

Second, while the US and China may agree to a truce, the ongoing decoupling of the world’s two largest economies will almost certainly accelerate again after the US election next November. In the medium to long term, the best one can hope for is that the looming cold war will not turn hot.

Third, while China has shown restraint in confronting the popular uprising in Hong Kong, the situation in the city state is worsening, making a forceful crackdown likely in 2020. Among other things, a militarised Chinese response could derail any trade deal with the US and shock financial markets, as well as push Taiwan in the direction of forces supporting independence – a red line for Beijing.

Fourth, although a “hard Brexit” may be off the table, the eurozone is experiencing a deepening malaise that is not related to the UK’s impending departure. Germany and other countries with fiscal space continue to resist demands for stimulus. Worse, the ECB’s new president, Christine Lagarde, will most likely be unable to provide much more in the way of monetary-policy stimulus, given that one-third of the ECB Governing Council already opposes the current round of easing.

Beyond challenges stemming from an ageing population, weakening Chinese demand, and the costs of meeting new emissions standards, Europe also remains vulnerable to Trump’s oft-repeated threat to impose import tariffs on German and other European cars. And key European economies – not least Germany, Spain, France and Italy – are experiencing political ructions that could translate into economic trouble.
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