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Feels like Déjà vu all of a sudden

It’s beginning to feel a lot like 1997 all over again - except this round, it could be different. It could be a BIGGER, FASTER and WILDER ride! When Thailand got the ball rolling by allowing the Thai Baht to float in July 1997 then, it raised fears of a global meltdown due to financial contagion. Global emerging markets and their currencies suffered enormously. When China devalued the Yuan last week, it kicked off a similar chain of unintended consequences, except this time, the impact will be far BIGGER than the 1997 contagion. The China’s economy today is far more important and integrated into the world than Thailand ever was. In fact the fallout from last week’s surprised move affected not only regional currencies like the Malaysian Ringgit, Thai Baht and Singapore Dollar, it infected global equities listed as far out as in France (LVMH), Switzerland (Richemont) and the US (Apple). These stocks have taken a tumble on the Yuan’s move and they continue to be sold down in the wake of it.

China’s big footprints on the global economy

China today is no longer just the ‘factory’ of the world. It is an important consumer of the world’s products and services. Many companies and industries depend on the Chinese consumers who are now ‘disadvantaged’ in purchasing power. So when it sneezes’, many around the globe may just catch a cold! Take Richemont, a listed stock in Switzerland, for example. Consumers may associate them as the parent company of luxury watch brands such as IWC, Cartier, and Panerai. Investors however, will also recognise that almost 50% of the revenue reported by the company last year, originated from Asia, largely China. The global financial markets today are far more interconnected and relevant to each other than they were in 97-98. Not only has today’s technology allowed FASTER and sometimes instantaneous access to market information, automated execution tools and algorithmic trading are currently leading the way in volatile periods such as the one we are in right now. All that the ‘humble trader’ is left with is to follow the crowd - usually at the most disadvantageous prices. The ride today could definitely be WILDER. Global stocks at these levels - despite last month’s pullback - are still at the top end of a multiyear bull drive. A run that has been almost entirely fueled by the access to cheap money. That access from one source may be at a turning point soon (debatable now after these past weeks’ events). Throw in the multiplier influences of ETF’s, indices, derivatives and synthetic financial products, we could be faced with swings wilder than we could imagine. With last night’s tumble on the Dow, the Kazakhstanis’ devaluation of the Tenge, and today’s selloff of the Nikkei 225, it is beginning to feel a lot like the panic has just kick-off!


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