US STOCKS tumbled and triggered a global stock market crash, with the Hang Seng Index falling heavily by 1,649 points in a day. Last night US stocks stabilised in the early trading session. However, it is still cause for concern where the markets are headed.
US president Donald Trump had boasted about his achievements, one of them being the stock markets reaching one high after another. Two weeks later, however, US stocks slumped for two days in a row. Opinions differ as to whether US stocks have reached a plateau and are about to change direction. Some believe that US stocks plunged by more than 1,100 points on Monday primarily due to technical factors. As there is not an apparent economic reason that triggered the fall, they are confident that the market remains bullish. Some commentators, however, are worried that as the US's fiscal policy becomes the norm, US stocks and bonds are in for a correction. Former Federal Reserve chairman Alan Greenspan has recently warned that there are significant bubbles in the US stock and bond markets. If the bubbles burst and interest rates rise sharply, it will have serious consequences for the real economy.
In January the growth rate of US hourly wages accelerated to 2.9 per cent, the highest level since the 2008 financial crisis. With the spectre of inflation looming, the yield on the 10-year Treasury note once rose to 2.88 per cent, triggering the US stock crash. The sudden rise of 10-year Treasury yield means that the American people's interest payments will increase significantly, which diminishes their consuming power. Experts believe that if the yield rises over 3 per cent, it could trigger a massive sell-off of stocks globally.
This year will see the mid-term election in the US. Donald Trump and the Republican Party, playing the economy card, are determined to have the cake and eat it. They want the rally in the stock markets to continue, economic growth to exceed 3 per cent, but inflation to remain at a low level. The problem is that Donald Trump's US$ 1.5 trillion tax cut plan is likely to escalate debts. Statistics from the Treasury Department show that the US has to issue bonds of US$3 trillion over the next three years. Donald Trump claims that he can devalue the US dollar by printing money to reduce the country's debt burden. But such a move is likely to fuel inflation. If Federal Reserve chairman Jerome Powell is determined to raise interest rates, not only will it put the stock markets and real economy under pressure, but it will also increase the government's cost of debt.
If money-printing were the panacea, economists around the globe would not have to scratch their heads. Quantitative easing is only a palliative measure, allowing Washington to trade time for space in order to deal with such structural economic problems as the excess of debt and wealth inequality. It is obvious that Washington has failed to use the time to promote what is beneficial and abolish what is harmful.
All bullish markets come to an end. The continuing rise in bond yields impact on the stock markets sooner or later. The crux of the matter is whether inflation in the US will go up significantly. To this no one has a definite answer at the moment. Since late 2015 the Federal Reserve has raised interest rates five times, all of which were not followed by Hong Kong banks. The reason was that the market was still flush with hot money and keeping HIBOR at a low level. However, once inflation in the US increases and the Fed is determined to speed up interest rate hikes, it is questionable whether Hong Kong's stock and property markets can stand in splendid isolation. Over the past month Hong Kong stocks have risen swiftly, rendering many ordinary investors impetuous, ambitious and unmindful of the risks. The global stock market slump has provided them a good opportunity to calm down.