As the world's major central banks adopt tightening policy leading to change the excess liquidity, which is altering the global macro market. According to Matthew Hornbach, global head of interest-rate strategy at Morgan Stanley, a phenomenon of global macro market changes is that with the shortage of dollar, the central bank's austerity policy has finally begun to spread to asset prices – bitcoin prices have fallen to their lowest level this year, the dollar-denominated gold price also fell to its lowest point since December 2017. As the world began to tighten, investors have started to abandon assets for cash. This also shows how valuable cash holdings are when major global central banks stop monetary easing and gradually tighten liquidity.
Some consider the U.S. stock market to be an exception. Although the Federal Reserve raised the interest rates again and again, the U.S. stock market continues to rise. At the time when the Fed's interest rate hikes continued in March last year, even Goldman Sachs said that this was not the market reaction that the Fed was expecting. However, if we are to observe the global financial market, we should not only focus on the U.S. The U.S. market is both an investment market and a safe-haven market. When the world is in turmoil, safe-haven funds will flood into the U.S. and increase the price of dollar assets. It is noticeable that although the U.S. stock market maintains a high level and the U.S. dollar has begun to strengthen, other global capital markets have performed poorly, especially in some emerging market countries, from South America to Southeast Asia, where stock markets and currencies are falling due to tightening policies, capital outflow begins to accelerate, and even financial crises in varying degrees have emerged.
The gradual tightening of liquidity by central banks worldwide is the root cause of changes in the macro market. The Fed has already been adopting austerity policy; first, it quit quantitative easing (QE), and then there is interest hike, which is the source of global austerity. Now, the Fed's balance sheet has been reducing US$5 billion a month (previous quarter was US$3 billion). The European Central Bank (ECB) has also begun to adjust its balance sheet. Although the ECB continued to delay the tightening policy due to debt problem in Europe and poor economic recovery, it finally determined the direction and timetable of the tightening policy, and the scale of ECB bond purchases has fallen sharply. The reason of the Fed and the ECB's austerity policies not being obvious is that, first of all, the global capital surplus is high and it takes time to withdraw liquidity from the market. Second, because of the central bank's release of liquidity in the past, there is still "hoarding" in various capital or asset markets, resulting market transactions still being active, and the effect of capital leverage is still functioning. Hence, investors are still able to reap the profits of the capital market and are not aware that the changes have quietly begun.
For these macro-changes to be more explicit there must be major market turmoil or some crisis that shock market confidence and change market expectations. The conditions that contribute to the crisis are gradually accumulating and are becoming more "mature". A key driver is the rapid increase in global trade frictions; the first US$100 billion trade war between the United States and China is about to begin. The United States-European trade war is also approaching, and Europe warns U.S. President Donald Trump that U.S. could face retaliation of $300 billion in automobile tariffs; the United States is still insisting on its own position on the North American Free Trade Agreement and unwilling to make concessions.
The declining of global liquidity and the tightening of financial policies will lead to more severe financial markets and financial conditions in many countries. Morgan Stanley warned that risks in major global markets could increase. Andrew Sheets, the Chief Cross-Asset Strategist for Morgan Stanley and JP Morgan strategist John Normand stressed that now is the end of easy money; the era of currency over-issuance is over, and there will be no more QE in ten years. The abundance of money in the past few years will hardly appear again.
It is worth noting that market austerity and policy adjustments are starting to appear in the Chinese market. The attractiveness of the appreciation of the U.S. dollar, the comprehensive strengthening of financial supervision, the introduction of new regulations for asset management, and the suppressions of various "financial innovations" that go beyond the bottom line, all these show that the era of the Chinese market full of money is officially over. In the past, the source of domestic wealth creation was price hikes, whether it was traditional wine, coal or crude steel, or real estate and stock market. Without exception, the price will rise. The fundamental reason for the rise in assets is that money is over-issued, and becoming less and less valuable. More than a decade ago, China's M2 currency in broader sense totaled only RMB 47 trillion, but it has expanded to RMB 174 trillion, a full increase of more than three times. This is also an important reason for the average price increase for 3 times in China over the past decade. With the tightening of liquidity, China's wealth creation model will undergo tremendous changes, and the way to make money by rising prices will become a thing of the past.
The history of the past few decades shows that each time the U.S. dollar index rises, some countries in emerging markets will have problems such as capital outflow and currency devaluation, which will seriously affect the economy of these countries. It is worth noting that this time it is China that feels the impact. Judging from the recent market performance, the U.S. dollar is showing appreciation trend, and the RMB exchange rate has suffered tremendous depreciation pressure. The sharp fall in China's stock market is a reflection of this risk expectation.
Final Analysis Conclusion:
From the longer period perspective of the global economy, the global market as a whole is still in the era of capital surplus, but as the major central banks tighten monetary policy, the global trade environment deteriorates and the possibility of economic decline has increased while the market effects of policy tightening begins to emerge. It is worth noting that in the current of macroeconomic changes, China may feel serious impact.
