Especially since the onset of the financial crisis that spanned the globe in 2007-2008, jittery markets, downturns, and all-out market pandemonium have become fairly commonplace. Before, a crisis in finance could be expected perhaps once every decade: You had the 1987 stock market crash, and the next major meltdown didn’t come again until the financial crisis in Asia in 1997-1998. Now, they seem to occur on a quarterly basis.
The convergence of events today, July 8th, reveal the deep cracks in the armor of the global financial system (if they weren’t already readily apparent). Though the acute, immediate losses did not match the flash crashes in Treasuries or the “fat finger” flash crash in Japan last year, nor was it as bad as the high-frequency trading spoof that induced a brief freezing of the Nasdaq about three years ago.
No, today’s panic was not on the same scale as these moments where the financial markets appeared perilously fragile. In fact, it more closely resembled the muted impact (though no less panicked response) to the recent cyber attacks that befell many large U.S. corporations and government agencies. Nonetheless, the sheet confluence of multiple far-reaching and far-flung crises marks today as an especially worrisome juncture in our recovery from the collapse of 2008.
Here’s a run-down of why it seems doom is waiting behind every door.
In case you hadn’t heard, the Chinese stock market has gone from the hottest buy on the planet to the bane of the Communist Party in a matter of a month. After hitting an all-time high in mid-June on the back of an 150% rally over the preceding 12 months, the Shanghai Composite index took an absolute beating over the next 3 weeks. The precipitous decline of Chinese equities (Shanghai lost a staggering 32% in 3 weeks, while the Shenzhen index lost 40% over that span) has revealed the unsustainable nature of the margin buying and state-sponsored share purchases that fueled the incredible bull run. Shanghai lost another 5.9% on Wednesday, dragging Hong Kong’s Hang Seng index down 5.8% along with it—and this is even with the government-imposed 10% limit that individual shares can rise or fall in a given trading day. Now that the Chinese government has stepped in with emergency measures to try and keep the markets propped up, investor confidence is dwindling, and one wonders how the global economy will respond to a deflating stock bubble in the world’s second-largest economy.
Again, if you haven’t perused the news in about 6 months, you might not realize that Greece is in a deep hole with its finances. Not only is the country unable to pay back its massive loans to the International Monetary Fund (IMF) and the European Central Bank (ECB), but austerity policies implemented over the last five years have left the country’s economy 25% smaller, and sent unemployment figures skyrocketing, especially among young Greeks. As the Greek debt crisis has continued to play out on the political stage between the country’s recently-elected leftist leaders and the political elite of Europe, the more important issue for the health of the global economy is the impact the crisis could have on the euro and the European market as a whole. It seems like an unsolvable quagmire at the moment, a real catch-22: if Greece is rebuffed and allowed to exit the eurozone, it hurts the credibility and integrity of the currency union; if Greece is rescued and remains in the EU, it risks hamstringing the eurozone further with yet another ill-conceived bailout package.
With Greece and China in flames in the backdrop, today started with the jarring announcement that United Airlines was suspending all of its flights due to an “irregularity” in its computing network. Thoughts quickly turned toward some sort of hack, and quickly escalated to (God forbid) potential terrorism. The airline maintained, however, that its glitch was only that and would be quickly resolved. UA was forced to keep everything grounded for about 2 hours between 8 am and 10 am EST, delaying over 400 flights and disrupting the schedules of thousands of passengers. Though the actual economic impact from the event was fairly minimal, this is the second time that the airlines have experienced serious computer malfunctions that caused long delays over the last month, raising concerns that the next incident will have even worse consequences. Moreover, if such delays and disruptions suddenly become a regular occurrence, the lasting deterrent to travel, business, consumer sentiment, and economic activity in general will be far more severe.
Even more alarming than the computers on the fritz at United Airlines was the technical malfunction that suspended all trading on the New York Stock Exchange (NYSE) for an excruciating 4 hours. Traders were immediately reminded of the Nasdaq “flash crash” of a few years back, as these kinds of disruptions on the trading floor are actually quite rare in the U.S., even given the diffusion of increasingly high-tech electronic trading mechanisms. With the stock exchanges so universally digitized, an incident like the trading freeze on the NYSE today raises concerns that those little electronic numbers on computer screens could be corrupted, manipulated, or downright disappear. Stocks still traded, and shares listed on the NYSE are also traded elsewhere, but the question of how vulnerable the major stock exchanges are to some kind of cyber attack (or even merely a glitch) that wipes out billions of dollars is becoming more concerning. For context, the NYSE and the Nasdaq, the world’s two largest stock exchanges, have a greater market capitalization than the next 10 global stock exchanges combined. (That’s a lot of dough at risk!)
Finally, all of these events overshadowed the release of last month’s FOMC meeting minutes. Usually a surefire market-mover, the Fed minutes hardly got any play at all in the financial media amid the ongoing crises in China and Greece, and the panic-worthy stories of the day with the NYSE and United Airlines.
Nonetheless, many analysts described these as the most inconsequential meeting minutes from the Fed since the pre-crisis years. Very little new insight was included in the Fed statement, as it constituted a simple rehashing of the remarks from the previous month’s meeting. The crucial decision of when the Federal Reserve will finally raise its benchmark interest rate from its current range between 0% and 0.25% remained cloudy; the committee held to its consensus expectation for a September rate lift-off, but this may have merely been posturing. Nearly all of the analysts in the financial markets, particularly given the events of the day, suggested that the federal funds rate won’t be raised until 2016 as the Fed remains careful not to roil the equities markets.
Overall, the Fed is stuck between a rock and a hard place about raising rates, and will likely talk a big game to keep the policy hawks at bay even as it has no plans for a rate hike anytime soon. The situation becomes even murkier when the breaches of cyber security, the political impasse in Europe, and the stock market nosedive in China are taken into account. (And we haven’t even mentioned the botched Iran nuclear talks!) Until these myriad sources of concern are at least partially resolved, expect the paper markets to remain panicked and volatile, by and large.