Geopolitical conflicts can have enormous impacts on global financial markets.
Governments around the world are working hard to stimulate economic growth through the institution of tougher policies. Some of these policies are making it harder for global investors to find investment growth.
Economic factors such as trade have slowed down over the past year, and this has proved to be a drag on industrial activity, on profits and GDP, in various economies.
The global economy has witnessed shrinking manufacturing and contracting growth indicators ever since 2018. Global profit growth, that was healthy at about 10 percent even a year ago, has dipped to under 2 percent today.
Nevertheless, these influences haven’t depressed markets as much as they might have. While equity markets have dropped by as much as 10 percent over the past six months, equity indices haven’t suffered similarly. They have remained more or less stable over the time period, continuing near the record highs that they have been at for a while now.
At least part of the credit for the resilience of the stock markets must go to policymakers, who have been determined to free up monetary policy. Their actions have lowered interest rates to levels not seen in years.
To investors, now, low interest rates mean that equities are an attractive investment alternative. The move to bring interest rates down has stimulated stock markets.
Where does the drag on economic and investment growth come from?
A number of factors may be responsible for the slowdown in investment growth seen. The trade war between the US and China is one of the most powerful growth retardants in evidence today.
Fortunately, positive developments are there to be found, as well, in connection with the political hurdles that the markets face. These developments have made investors hopeful that growth may be on the horizon.
To be sure, market observers are more positive about healthy developments in the near future. No one yet believes, however, that the primary problems affecting the markets have been resolved.
Uncertainty remains in a number of areas
The new government in Italy doesn’t seem as stable as the previous government, but it isn’t likely to see budget friction with the European Union.
In Germany, Alternative for Germany, a populist party, is performing better than ever before. While it hasn’t won elections yet, it is performing well enough to worry the government led by Angela Merkel.
Brexit, in Britain, is causing political turmoil again. The chances of a Brexit without economic damage, appear minimal.
In China, the Hong Kong stock market rose 4 percent after protesters won on one demand — the withdrawal of the extradition bill. The remaining demands of the protesters, including the one seeking the institution of independent inquiries into reports of police brutality, have been unmet. The protests continue for this reason.
Even more importantly, trade negotiations between the US and China are seeing progress. A new high-level meeting is planned, shortly. Yet, a number of false starts have occurred in the past. It can be hard to tell how significant the new meeting really will be.
With each one of these issues, a great deal depends on how successful policymakers and lawmakers are in finding resolutions.
Nevertheless, the European Central Bank and the US Federal Reserve, both, appear to be willing to make whatever changes they can to help boost economic growth.
With interest rates already at historic lows, however, they may not be able to do a great deal, should trade tensions between the US and China take a turn for the worse.
The governments of large economies around the world are receiving considerable pressure to loosen up spending to help reverse negative economic trends.
In most cases, however, such pressure is likely to be inadequate when it comes to stimulating economic growth and the growth of investment markets.
China may be able to bring financial and fiscal stimulus moves to bear far more quickly than other large economies, but it’s unclear how effective China can be on its own.
If there are no further negative developments, the global economy will probably stabilize.
Even if stability does arrive, however, it doesn’t seem likely that corporate profits will pick up steam, or that major economies will accelerate again. For investors, it would be best to tread cautiously, even if the equity markets do appear healthy.
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