Global equity markets surged sharply this week, as rising bond yields and weaker growth prospects have shaken investors' appetite for riskier assets. Switching to risk mode benefited from gold, but not from cryptocurrencies, as this last market recorded an 11-digit dip on Thursday.
China was the center of the storm this week, when investors returned from the Gold Week celebrations with disappointing economic data, growing commercial tensions and an insufficient response from central bank policy.
Bull Market in Jeopardy
After recording the best quarter in five years, US equities have suffered numerous steep declines since the beginning of October. This culminated Wednesday and Thursday with a dive of 1,300 points in the Dow Jones Industrial Average, marking the worst two-day period since February. The broad S & P 500 index also fell to more than three months, which triggered a sharp increase in volatility.
The CBOE VIX, the preferred measure for investor anxiety on Wall Street, surpassed 26 this week to reach the highest level in six months. The so-called indicator of fear reverses the futures of the S & P 500 index approximately 75% of the time.
The dramatic declines of Wall Street have caused even greater losses for the reference indices of China, which on Thursday were reduced to the long-term lows. The Shanghai Composite index recorded a modest rally on Friday, but still closed the week with a 7.6% loss. Markets in Europe, Japan, Canada and Australia also closed significantly lower.
IMF Downgrades Outlook
The International Monetary Fund (IMF) has lowered its forecasts for global growth, citing rising import tariffs as a primary concern. The Washington-based lender has lowered its forecast for global economic, Chinese and US growth of 0.2 percentage points each by 2019. At 6.2%, China's expansion is expected be the weakest since 1990.
A commercial war in mourning with the United States does nothing but exacerbate China's broad economic slowdown, which began many years ago when Beijing undertook a slow transition from the smokestack industries to consumption. Although Beijing has responded to the Trump administration tariff policy, it will not be able to match duties on a dollar-by-the-dollar basis.
As reported by Hacked on Thursday, President Trump and his Chinese counterpart Xi Jinping are scheduled high-level commercial talks at the next Group Summit of 20 in November. Both sides were planning detailed negotiations last month before the US promulgated a new round of tariffs for $ 200 billion of Chinese goods.
Cryptocurrencies Fall but Bitcoin maintains support
After weeks of relative calm, the cryptocurrencies experienced a good selloff on Thursday. More than $ 16 billion was wiped out by market capitalization combined with bitcoin, Ethereum and other important assets that led to decline.
There was no immediate catalyst for the sudden inversion, although the pattern of rapid decline after relative calm was observed earlier. The cryptocurrencies are struggling to make new technological discoveries despite the improvement of fundamentals.
Despite the loss, the bitcoin continues to defend $ 6,000 – a critical level that is commonly associated with the cost of extracting virtual currency. Thursday's 6% decline dragged prices to the low region of $ 6,200 before recovering 24 hours later.
Week by week, cryptocurrency market capitalization decreases by about $ 18 billion. However, trading volumes increased slightly.
The week ahead
Next week, all eyes will be on government bond yields, while investors continue to assess the impact of rising interest rates on the market. Despite a sharp decline in the middle of the week, U.SG's 10-year bond yield continues to show bullish potential. According to Jeffrey Gundlach, the so-called "king of bonds", the benchmark yield could reach 3.6% in the short term.
"If you look at the graphs and look at market behavior and think about the trends that lie below the bond market, it would not surprise you to see the 30 years go to 4% before this breakout move of more than 3.25% is over, "Gundlach told CNBC on Thursday.
Until now, cryptocurrencies like bitcoin have not benefited from the demand for safe haven following the broad market recession. It remains to be seen whether traditional investors will find comfort in bitcoin status as an unrelated asset if bond yields continue to press.
Disclaimer: The author owns bitcoin, Ethereum and other cryptocurrencies. It holds investment positions in the currencies, but does not carry out trading activities in the short term or daily.
Featured image courtesy of Shutterstock.