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2019-12-20Macro `n Cheese

The Top 5 Events That Shook Markets in 2019

Violent protests, Incendiary Brexit talks and capricious trade negotiations. Our team of analysts has created a list of the top five most impactful events of 2019, with an accompanying chart, of course. Check out the top five events that will have effects long after the dust from new year’s rockets has settled.

5. The Hong Kong protests

Hong Kong has been roiled by protests since the government proposed its extradition bill in late February. The protests led to capital destruction and disruptions in infrastructure to the degree that Hong Kong's GDP growth actually decreased for two quarters in a row, making the island effectively enter a recession.

 

This crisis has raised many concerns idiosyncratic to Hong Kong. The island has long had its currency tightly knit to the US dollar. This has not posed many problems as they simultaneously have enjoyed a large amount of surplus liquidity parked in the country’s financial institutions, but this strategy assumes high confidence in the island as a safe financial haven. With the future of Hong Kong unclear, capital will flow to other countries such as Singapore, and bad might turn to worse for Hong Kong.

 

4. The Latin American struggle

Several countries in Latin America have had a rough year. High costs of living and rising inequality in Chile made thousands of protesters take to the streets in October, while Venezuela’s protest movement began anew after Bolivia’s president, Evo Morales, was ousted from power.

However, as our blog post from late November made clear, the broader Latin American picture is more complex. If you exclude the outliers Argentina and Venezuela, the region is experiencing growth and inflation around the target of 2%, which have recently been adopted by many central banks on the continent. That being said, the struggle is far from over, as the prospect of being dependent on commodities such as oil and cattle for export is unlikely to make any economy less volatile.

 

3. The September Short Term Funding Panic

In mid-September, chaos ensued when the overnight lending rate suddenly soared. The Federal Reserve countered it by injecting a large amount of extra liquidity into the system through Temporary Open Market Operations (see chart). Although partly due to a technical error, it raised a debate on whether this was a temporary mistake or revealed a systematic lack of liquidity since Central Banks started to cut down on QE’s.

Our chief economist shared his thoughts on the matter in the US Bank Reserves post. He concludes that although available liquidity is high from a historical perspective, the recent crisis probably stems from a lack of excess liquidity, rather than a few banks experiencing funding issues, which would be a lot more worrisome. Whether this is the new normal or not remains to be seen.

 

2. Brexit Postponed

Although the decision was made back in 2016, Great Britain’s exit from the European Union continued to dominate British politics during most of 2019. On the 24th of July, Boris Johnson became prime minister with the promise to leave the union “no matter what it takes”, cemented by a successful snap election in December.

This created a stormy year for the British market, especially as there is no consensus on just how large UK’s leverage will be when they negotiate their own trade deals. This might also create an opening, as the UK has had a trade deficit for some time (see chart below). Of course, all of this builds on the presumption that they actually manage to leave some day.

 

1. The Trade War, Continued

The trade war between US and China has continued unabated, and the storm is picking up speed. Spring started off with President Trump declaring that American companies are forbidden to use  telecommunication technologies from Chinese companies, among them Huawei. China then made a symbolic retaliation by calling the Chinese people to prepare for a new “Long March” – widely interpreted as a protracted trade conflict with the US.

In November, a glimmer of hope emerged when Trump announced that a deal might be finalized. For friends of free trade, however, the hope for a tariff-free world was crushed when Trump refused to appoint new judges to the World Trade Organization, thereby removing its dispute resolution function. The US-China conflict, as discussed in our blog post a few months back,  has redrawn the map of world trade, with some countries such as Mexico and Vietnam picking up the demand for cheap goods. As China is shifting its trade focus to other regions, the US is experiencing competition as the world’s most influential economy:

 

So, this was our take on the most important happenings this year. Stay tuned as we follow their (and others’) impact into 2020. Happy New Year!

 

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Disclaimer

We don’t usually have views and opinions about economic and financial states of affairs, (not ones that we express publicly as a company, anyway). We do believe, however, that people can and do appreciate a variety of perspectives. What you’ve just read is the perspective of our resident chief economist. While we think he’s very smart, Macrobond Financial does not expressly endorse the views he presents here. And, as the old adage goes, you shouldn’t believe everything you read (not without finding the data, performing a few analyses and presenting it in a nice chart). We want to make it clear that we are not offering this information as investment advice. That being said, if you have the application you can easily check everything that’s mentioned here, and decide for yourself. If you don’t have the application, now you have a great reason to get it.