3 Major Banks Are Now Warning of Another Global Recession

Thursday, August 24, 2017
By Paul Martin

August 24, 2017

Highlighting conditions similar to the lead-up to the 2008 financial crisis, three major Wall Street banks this month issued warnings that a proverbial “Winter Is Coming” for planet-wide financial markets. From Bloomberg:

“HSBC Holdings Plc, Citigroup Inc. and Morgan Stanley see mounting evidence that global markets are in the last stage of their rallies before a downturn in the business cycle.

“Analysts at the Wall Street behemoths cite signals including the breakdown of long-standing relationships between stocks, bonds and commodities as well as investors ignoring valuation fundamentals and data. It all means stock and credit markets are at risk of a painful drop.”

Andrew Sheets, chief cross-asset strategist at Morgan Stanley, wrote in a note to traders Tuesday that a large part of the problem is that investments are increasingly untethered to Forex (FX), the decentralized global market for the trading of currencies.

“Equities have become less correlated with FX, FX has become less correlated with rates, and everything has become less sensitive to oil,” Sheets wrote.

Morgan Stanley’s financial model shows that global assets are the least correlated they have been in a decade. Essentially, investors are basing decisions solely on factors specific to the individual stock and ignoring larger outside drivers like manufacturing data — just as they did in the last half of the 2000s.

As this occurs, relationships between assets break down, as Sheets wrote Tuesday:

“These low macro and micro correlations confirm the idea that we’re in a late-cycle environment, and it’s no accident that the last time we saw readings this low was 2005-07.”

All this investor confidence has led to a decrease in stock market volatility. That’s not a good thing, says Steven Major, global head of fixed-income research for HSBC Holdings.

“Low volatility across asset classes may give a false sense of security and bond markets may be caught napping,” Major wrote in a note to clients on August 8. He added that “years of international spillover from quantitative easing” increase the risk that local triggers will have a greater impact on global markets.

The Rest…HERE

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