The most recent actions in the markets show that volatility is increasing again, driven by a cocktail of key factors which strongly influence the market action.
The period of turmoil started with the pandemic, back in 2020, when we witnessed large swings and trends in Forex, commodity, and stock markets, initially sparked by a shock that the global economy was brought nearly to a halt, in the conditions never seen in the newer history.
The period of recovery after waves of tough restrictions eased, brought a bit calmer market condition, which proved to be just a short pause ahead of a new storm.
The first warning came from rising inflation in the Western economies, but it has not been taken as a serious warning, as inflation was lethargic for a number of years, and measures taken by the central banks to push it higher, did not give any significant results.
Instead, the central bankers were seeing rising inflation as a temporary phenomenon that was expected to peak and start easing within a short period of time, reacting a bit late, after they realized that the inflation is rolling like a snowball and getting bigger and bigger.
They were also late to recognize and point to the source of the problem, which was sparked by enormous amounts of money that have been pumped into the economies during the pandemic crisis, to keep them afloat and prevent a total collapse.
Huge amounts of money came from partially uncontrolled printing of money that initiated a strong rise in consumer prices, which was accompanied at a later stage by a global shortage of certain goods and a strong rise in demand that supply was not able to follow, adding to inflationary pressure.
The problem with rising inflation deteriorated with the start of the military conflict in Ukraine, with the first wave of uncertainty about all negative impacts of the war, being followed by massive sanctions on Russia, imposed by the Western world.
Sanctions sparked a huge instability in the economies, primarily due to a shortage of energy products, as imports from Russia were banned.
The European Union faced the strongest reverse impact from sanctions, as the bloc itself and particularly the largest economies and countries closer to the eastern borders of the EU, are highly dependent on Russian energy and initial shortage in gas supplies, which were partially excluded from the set of restrictions, are currently on barely 20% of capacity, with threats from Russia that supplies will be completely cut, ahead of the winter, could lead into a disastrous scenario.
The sharp rise of natural gas prices on a huge disbalance between the supply and demand, caused a chain reaction, hitting all sectors of the economies, with skyrocketing electricity and rising food prices, hurting the households, which struggle to cover high expenses, with growing fears that conditions would deteriorate during the winter.
The major central banks responded by raising interest rates, in an attempt to bring soaring inflation under control.
The US Federal Reserve was the first to act and pushed its interest rate from zero to 3.25%/3.50% range in several policy meetings during the past few months, followed by the Bank of England, the central banks of Australia and Canada, as well as the European Central Bank, which initially hesitated to act, but eventually pushed its benchmark rates from negative to neutrality territory so far, remaining ready to raise rates further, but the decision will be data-dependable.
Only the Bank of Japan remained on hold, keeping its ultra-loose monetary policy unchanged so far, but keeping the door for action open, as inflation in Japan rose to 3% in August from 2.6% in July.
The situation in the European Union, Great Britain, and the United States are more serious, as inflation in the EU hit a historical high at 9.1% in August and is expected to rise to 9.7% in September, while consumer prices in the UK rose to 40-year high and hit a double-digit value at 10.1% in July, to ease to 9.9% in August.
Inflation in the US hit the highest at 9.1% in June, easing to 8.5% in July and 8.3% in August, but the last figure was above expectations, keeping in play fears that inflation may not have peaked yet.
The Central Banks stressed that their main mission is to restore price stability and that current actions were the most appropriate way to fight inflation but said that the measures are not going to give immediate results, expecting inflation to remain elevated during the last months of this year and through 2023, to eventually start moving towards the central banks’ targets in early 2024.
As a result, markets became turbulent, with the US dollar being the top winner, advancing nearly 19% against the basket of its major world counterparts in the nine months of this year.
The dollar was strongly supported by global economic and geopolitical uncertainty that caused a massive migration into safety, while recent strong rate hikes by the Fed and signals that the central bank would remain on an aggressive path and even raise interest rates above expectations are likely to keep the greenback the most attractive asset for some time.
On the other side, the Euro fell below parity vs the dollar and hit the lowest levels since 2002, pressured by the robust dollar and growing uncertainty about the economic situation in the Eurozone, as the bloc’s economy is sliding into recession.
The British pound was among the top losers, as it fell to a record low against the dollar, with deteriorating economic conditions in the country and a new plan of the British government to pump more money into the economy (approximately the double amount compared to financial aid during the pandemic crisis) that caused a wave of criticism from many economists, as the action would further increase Britain’s debt.
Gold price fell to the lowest in almost 2 ½ years, despite the metal being a safe haven asset and used as a hedge against inflation, as dollar-denominated gold came under pressure from the strong greenback rise.
Crude oil in a downtrend since June, after the prices, surged at the start of the war but failed to sustain gains on growing concerns about global demand, which fell on the recent Covid lockdowns in China, the biggest world oil importer, and growing fears about a recession that would further lower demand.
Both contracts, WTI and Brent are holding near 2022 lows and remain under pressure of strong negative impact from an expected economic downturn.
The overall outlook remains dark, as economic conditions deteriorate, while geopolitical situation remains overheated and threatens further escalation that also sends shockwaves through global markets.