A quick review of financial market movements in the past couple of weeks reveals that traders seem to have lost their appetite for risk. How did this happen and what does it mean for forex price action?
1. Global growth concerns
You can tell that things ain’t lookin’ too good when the IMF starts using the words “serial disappointments” to describe global economic performance! In their latest meeting, the IMF decided to downgrade growth forecasts once more, projecting that the global economy would expand by 3.8% next year instead of its previous 4% estimate.
IMF Managing Director Christine Lagarde warned that growth prospects could continue to worsen in the coming years, particularly in the euro zone. Apart from confirming the higher likelihood of a euro zone recession in the next six months, Lagarde also mentioned that Japan could see weaker output and that developing economies could be in for a slowdown.
Not even China, the world’s second largest economy, is immune from these risks. As I’ve highlighted in my latest Chinese economic roundup, overcapacity and a downturn in global demand are posing risks to the country’s inflation and employment levels.
2. Downturn in inflationary pressures
Speaking of inflation, it appears that the recent slide in commodity prices is starting to take its toll on the CPI figures of most major economies. For instance, the latest U.K. CPI readings have reached record lows, as headline inflation tumbled to its lowest level in five years.
Leading inflation indicators are also hinting at a sharp decline in price pressures. China’s producer price index (PPI) for September marked a steep 1.8% drop, suggesting that consumer inflation could fall further. In the U.S., the September headline PPI showed a surprise 0.1% decline while the core PPI stayed flat.
Bear in mind that most of Europe is already faced with the possibility of deflation, with the ECB already employing easing measures to stoke price pressures and the SNB opening up to the idea of using negative deposit rates to keep inflation afloat.
3. More cautious central banks
As Forex Ninja mentioned in his article on the 3 Reasons Why Forex Trends Might Slow Down in Q4, some central banks are shifting to a less hawkish stance and confirming that a more cautious outlook is warranted. In particular, the Fed and the BOE seem less inclined to start tightening monetary policy next year since there are still plenty of roadblocks to recovery.
Minutes of the latest FOMC meeting indicated that global growth and inflation prospects are looking dim, with this week’s U.S. data releases confirming that the economy isn’t out of the woods yet. Meanwhile, the BOE statement contained concerns about the looming euro zone recession and its potential drag on U.K. growth.
4. Ebola outbreak and geopolitical risks
Another factor that might keep risk-taking in check is the worsening Ebola outbreak which is becoming an international concern. For now, it appears that this issue is hurting global equities, particularly the shares of companies in the airline and tourism industries. But with forex traders already trimming their riskier holdings due to widespread uncertainty, it’s possible that overall risk appetite could take another hit if the Ebola crisis keeps dominating the headlines.
Of course some market analysts insist that this pullback in risk-taking is just part of the normal ebb and flow of price action, as traders take these catalysts as a sign to start booking their profits from the recent rallies. In other words, there’s no need to panic… for now. Do you think the risk-off environment is here to stay?