What is happening in the world of finance and global markets

Last week, global financial markets experienced a state of turmoil and uncertainty due to fears of a potential Third World War, inflation and rising interest rates. This led to historic sell-offs resulting in major and painful financial collapses, with stock markets dropping by more than 10 per cent after a strong recovery in previous periods, especially for technology stocks. The financial world witnessed violent events that negatively impacted market performance, resulting in severe trillion-dollar losses that contributed to the evaporation of over $3 trillion in stock market value at the start of the week.

The fear and anxiety index surged to its highest level in 4 years, up more than 120 per cent from the previous week. The Japanese “Nikkei 225” index experienced the biggest decline, losing $620 billion of its market value, according to “Al Arabiya Business” reports, in addition to losses in other Japanese stocks. The MSCI Emerging Markets Index lost $504 billion, while the Stoxx 600 European Index lost more than $300 billion. In the US, with American markets opening to last week's losses, the scope of the loss expanded significantly, reaching over $2 trillion. The market value of the top 9,143 companies worldwide dropped to $101.8 trillion, down from $103.8 trillion. Financial experts noted that these losses are the largest since the COVID-19 pandemic.

Global financial markets experienced a panic and a violent sell-off of stocks and cryptocurrencies due to increasing fears of carry trade operations since last week, following the interest rate hike in Japan and the Yen rising to 143 yen per dollar, coupled with modest US employment data and the Federal Reserve's decision to keep interest rates unchanged. The general weakness in US economic performance intensified market panic, with the Nikkei 225 index dropping by 18.2 per cent in two days and 12.4 per cent on Monday, marking the worst market performance since 1987. Additionally, US markets lost $7 trillion of their market value over the past week, with major declines in Wall Street indexes: the Dow Jones and S&P 500 dropped by more than 4.3 per cent, and the Nasdaq by 6 per cent. Cryptocurrencies also saw a significant collapse, with over $1 billion liquidated in 24 hours and Bitcoin's market value dropping by more than $270 billion in one day.

The financial market collapses experienced globally are not unprecedented. Notable financial setbacks have occurred approximately 100 years ago, including the 1929 stock market crash (the Great Depression) with the collapse of the New York Stock Exchange, leading to a severe and prolonged economic contraction in the US and Europe due to excessive speculation and economic instability, which resulted in fundamental changes in global economic and financial policies. The European sovereign debt crisis (2010-2012), which began with the Greek debt crisis and extended to other countries such as Italy, Spain and Portugal, caused significant volatility in European stock and bond markets, leading to slowed economic growth and increased unemployment. The US mortgage crisis (2007-2009) began with the collapse of the mortgage market and spread to global financial markets, leading to the collapse of financial institutions and causing a global economic crisis. Finally, the dot-com bubble (2000-2001) started with the collapse of technology and internet stocks due to excessive speculation and inflated valuations, leading to significant investor losses and economic slowdown.

The prevailing financial panic has been fuelled by various economic and political reasons, including geopolitical tensions and escalating conflict with Iran, Russia and China, the Middle East crisis increasing fears of a potential widespread war, tensions in Eastern Europe, and increased military activity. Additionally, the confrontation in the Pacific, marked by increased military presence, coupled with economic pressures due to a weak US economy, declining bond yields, high inflation, stagnant wages and China's recent real estate issues.

Regarding strategies to prepare for potential future market fluctuations, they include diversification and investing in a variety of assets such as stocks, bonds, real estate and commodities; maintaining sufficient liquidity to handle sudden declines; managing risks using studied and proven hedging tools such as options and futures contracts to reduce exposure in case of market downturns; focusing on long-term investments and high-quality assets expected to provide good returns over the long term rather than short-term speculation; monitoring economic and political trends to predict potential fluctuations; and finally, geographic diversification by investing in markets and assets in different regions.

As for hedging policies, investors commonly use various tools to hedge against market risks, including options (which give investors the right but not the obligation to buy or sell an asset at a specified price on a future date), futures contracts (binding agreements to buy or sell an asset at a specified price on a future date), swaps (agreements to exchange cash flows between parties under specified conditions), forward contracts (binding agreements to buy or sell an asset at a specified price on a future date) and diversification, such as investing in a variety of assets from different sectors, is also used.

To avoid financial crises, there are several internationally tested and approved methods, including strengthening supervision and regulation of the financial sector, implementing stricter and more effective laws and rules to mitigate risks, enhancing transparency and disclosure in financial markets, improving regulatory bodies' monitoring and analysis capabilities, developing more effective fiscal and monetary policies to address economic fluctuations, boosting financial literacy and awareness among investors, and increasing training and financial education for investors. Additionally, enhancing international cooperation and coordination and developing consistent international regulatory and supervisory frameworks to expedite information exchange among regulatory bodies and cooperate to find international solutions to cross-border financial crises.

In conclusion, while global stock markets have recently reached high levels, prompting investors to move towards safe bond markets like US 10-year Treasury bonds, which has led to significant speculation to adjust markets, much of this speculation was fictitious and relied on various financial contracts such as carry trade and future deals. Despite this financial tsunami, it is unlikely to cause an economic recession or require emergency intervention from the Federal Reserve to lower interest rates. Market indicators suggest a potential 50 basis points rate cut in September, which might gradually revive the financial markets in need of correction.

Haider Al Majali is an economic finance expert