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A ticking time bomb in China has global markets looking really shaky right now

Trista Kelley
China tug of war

Reuters/CHINA STRINGER NETWORK


  • Global markets are jittery in recent days as fears about growth in China take hold.
  • "The larger the stimulus used by China to offset the trade war impact, the bigger will its deficit likely be," Tao Wang, UBS's chief China economist, said in a report on Tuesday
  • Markets are also worried about the ongoing Italian debt crisis, and the rising price of oil.

Trouble is brewing in global markets. Look no further than China. 

China's current account balance is down significantly from last year's 1.3% and will likely turn into a small deficit in 2019. If so that would be the first time in 24 years.

"The larger the stimulus used by China to offset the trade war impact, the bigger will its deficit likely be," UBS's Tao Wang, chief China economist, said in a report on Tuesday.

That may hurt confidence and hasten outflows, putting pressure on the nation's currency. 

"Although CNY depreciation can partially offset trade war impact, a large depreciation will likely hurt domestic confidence, trigger panic outflows and risk financial stability," UBS said. 

In the US stock market, Morgan Stanley says a bear market correction could arrive in 2019, sooner than markets currently expect.

After years of monetary stimulus and a short-term boost from the Trump administration’s tax cuts, more rate rises and lower bond prices will ultimately bring the US economy to a halt. But "before this occurs, it appears we will get a final spike higher," in yields, Morgan Stanley says.

The IMF lowered its outlook for the global economy, saying it will grow 3.7% this year, the same as in 2017 but down from the 3.9% it was forecasting for 2018 in July.

China has accepted its fate: Beijing is coming to terms with a lower rate of growth as the trade war with the US escalates, Barclay's chief China economist, Jian Chang, told CNBC. Tit-for-tat tariffs and reduction in Chinese export growth might trim between 0.5% to 1% off the Chinese economy, she said.

China's issues are leading major banks to question the strength of its stock market, with JPMorgan cutting its outlook on the country's equities from overweight to neutral last week.

The bank thinks the trade war brewing between Beijing and the Trump administration will have a negative impact on China's economy and, as a result, hit stocks.

"Total impact on China's GDP growth is 1.0%, if China does not take countermeasures," a team of JPMorgan analysts wrote.

Italy is also troublesome

Italy flag jets

Reuters/Giampiero Sposito

Away from China and the USA, issues in Europe are also partly to blame for market jitters sweeping the globe. After a few months out of the limelight, Italy has sprung back to the forefront of investor concerns.

Last week, Italy submitted its spending plans for the next year to the EU. The budget came as a shock: The country said it planned to spend a whopping 2.4% more than it makes over the next three years.

This target risked breaching EU rules. Investors balked, sending the country's bond risk premium higher, and the euro tumbling.

Italy's longstanding high levels of debt are well-known, but previous governments had all at least paid lip service to the idea that they would reduce that debt. The current populist coalition is barely even doing that, and this is scaring people.

What's worse is that this week, research from Nomura suggested it could be decades before Italy can rein in its government debt to a level that meets European Union rules.

It's not just China and Italy that are worrying investors though.

Oil is also driving market concerns, with throttled output from major producers threatening to push prices even higher, and drag down total economic growth.

A combination of low output from OPEC producers coupled with looming sanctions from the USA against Iran has pushed up prices for oil in recent months, sending it to a more than four year high.

High oil prices tend to stunt economic growth, particularly in developing markets where increasing oil consumption is a key driver of rapid growth. The current situation, which sees Brent crude oil, the international benchmark, trading above $84 is particularly troubling, and was described as a "risky situation" by one of the most powerful people in the market this week.

"We should all see the risky situation, the oil markets are entering the red zone," Fatih Birol, the executive director of the International Energy Agency (IEA) said on Tuesday. Birol appealed for OPEC producers to increase output, warning that failing to do so will make for a "very, very challenging" end to the year.

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