A toxic mix of economic and geopolitical ingredients are signaling the outbreak of war in the Middle East that will trigger a global equity market crash.
As Trends Journal subscribers are well aware, we forecast in one of our Top Trends for 2018, “Market Shock, Mass Murder,” how a U.S./Israel/Saudi alliance was crafting an anti-Iran, anti-Hezbollah strategy for increased military intervention in Syria and Lebanon, and regime change in Iran.
President Trump’s decision to exit the Iran nuclear agreement, impose additional sanctions against Iran, open the United States Embassy in Jerusalem, in violation of International Law, and Israel’s massacre of Palestinian protestors, have not only ratcheted up the prospects for war, they helped push oil prices higher.
Beyond the prospect of Middle-East War, equity markets worldwide, based on our tracking of several key economic indicators, are positioned for a meltdown whether or not war erupts.
Since the Panic of ’08, markets have been artificially propped up with cheap money fueling merger and acquisition activity and stock buybacks, both of which have now accelerated to record-setting levels as a result of President Trump’s corporate-friendly tax bill.
THE TOXIC RECIPE
When equities began their decline in February, it was based on the fear of rising interest rates. On Tuesday, Treasury bond yields hit its highest level since 2011, peaking at 3.09 percent. As investors see the higher yields as a safe investment vehicle, they’ll pull away from investing in stocks.
Also on Tuesday, emerging market currencies sunk deeper as the dollar climbed to its highest perch since December on the news that robust retails sales in the U.S. would likely prompt the Federal Reserve to raise interest rates three more times this year.
The dollar has shown increases 17 of the past 21 days, while every major emerging market currency, with the exception of the Russian rouble and Philippine peso, has declined verses the dollar over the past month.
As their currencies weaken and the dollar grows stronger, the cost to emerging markets to service their $7 trillion of debt increases. Investor pullout from EMs have accelerated with equity funds suffering their worst outflows in a year, prompting investors to pull nearly $30 billion out of EM exchange markets.
Considering that the dollar is seven percent weaker than it was at the start of 2017, should it and interest rates rise higher, EM equities will be pushed sharply lower, as will all the deeply indebted and overvalued stock markets worldwide.
TREND FORECAST: Beyond the Emerging Market retraction, recent data is also signaling economic slowdowns in the UK, Eurozone, China, Japan and India. Deep in debt, and pressured to keep their economies growing, their interest rates will not rise, their currencies will weaken and the dollar will grow stronger.
Already in the States, with the dollar and interest rates rising, mortgage applications, whose rates have hit a seven-year high, along with auto loans, are declining.
And, globally, with wages stagnant, higher prices at the pump will significantly eat into discretionary consumer spending. Indeed, should gas prices hit $3 per gallon in the U.S, some $30 billion of consumer spending that would have been spent in the retail market will be spent on fuel.