Alex Christensen of Global Risk Insights offers a warning to global investors dealing with the global turmoil and U.S. stock markets. Developments in Ukraine and the Middle East can prove harmful to the U.S. stock market. With the unfortunate Malaysian Airlines crash being a result of actions of Russian-tied rebel factions, there is increased pressure on the European Union to impose economic sanctions on Russia. Even though the U.S. will likely press for crippling actions on the Kremlin, Europe had a lower appetite for this move because their economic prosperity is tied to access to plentiful Russian energy sources. Now with this distasteful event, Europe will face more outward pressure to respond to their neighboring menace even if it contributes to a recession for them.
Then there are rising tensions in the Middle East where ISIS are gaining ground in Syria and Iraq, while Israel is expanding operations in rooting out Hamas in Gaza. This is also spooking global investors that are concerned about about free flowing oil. If access to oil is compromised by these developments, then that can dampen economic growth because businesses and consumers rely on crude oil to keep their energy prices low. If crude oil becomes scarce, then that will drive up the cost of gasoline and causes both consumers and businesses to downsize.
Global investors are aware of the risks associated with Eastern Europe and the Middle East and have sent their funds to safe U.S. Treasury securities. Even though Standard and Poor’s have reaffirmed the U.S. credit rating at AA+ due to high budget deficits and Congressional gridlock, they still remain a safe haven for investors seeking safety. When investors start buying bonds, this drives down their yields and thus bring down other interest rates associated with it, such as the prime interest rate and the mortgage rate.
With interest rates remaining low, there is enhanced risk of asset bubbles. As implied by Christensen, the Fed has been trying to normalize interest rates, which have been artificially lowered by Fed policy aimed at boosting employment. Even though the Fed actions have undoubtedly improved labor markets with U.S. unemployment rate on the decline, it has roiled foreign markets, who are struggling to tamp down inflation and prevent asset bubbles themselves. Eventually, these same symptoms could be felt in the U.S., especially if signs of a more robust recovery becomes more consistent. Stronger labor markets will provide U.S. consumers with more security and income, thus resulting in more savings. If U.S. consumers decide to shift their increased savings to the U.S. stock market, then there is concerned that this could push equity prices to unsustainable levels and cause a market crash.
All of these events can compromise Fed policy and end up swallowing wealth in the long-run.