The Internation Monetary Fund has cut its growth forecast for the world economic growth citing uncertainties around the trade war between the U.S and China. The questions is why the Fed hasn't paid any attention to this?
There you have it. The clouds of uncertainty started to pour heavy rain. The International Monetary Fund raised (IMF) concerns about the world economy. The IMF has cut its projection for the global expansion to 3.7% for this year, from its previous projection of 3.9%. Christine Laggard, managing director of the IMF, did say in her last speech that the global trade war is a matter of concern for the Fund. This is the first time we see the Fund downgrade their forecast since July 2016.
Is the IMF wrong in forecasting this? Considering that we have not seen anything like this coming from the Fed over in the US, is it possible that the Fed is in a state of denial? After all, it is intriguing that the Fed has expressed no serious concern about the ongoing trade war. They kept a neutral stance from the beginning, even though several other central banks around the globe raised the issue.
Clearly, there is a risk and the new outlook suggests fatigue is setting in, with the mounting weakness in the emerging markets threatening to further dampen the outlook. The risk to global outlook has increased significantly in the past three months and there is no clarity as to when the trade war between the US and China will settle.
The People Bank of China lowered its reserve ratio RRR for banks. This is basically a strategy to boost liquidity in the system. Investors panicked thinking that the PBOC is worried about growth. The fact is that they have lowered the RRR three times this year. The current reaction was most likely fuelled by speculators. I am not saying that growth in China is astronomical. The fact is that smaller companies are facing a tough time in securing loans and the rising borrowing cost increases the operational cost. However, the most significant fact is that China’s current economic growth rate (6.7 percent) is still above the government’s full-year target of 6.5 percent.
And here’s an even more important fact. China is the biggest foreign holder of U.S. Treasury bonds. If the trade war escalates, then do not forget, that it won’t be long before China might start to dump U.S. Treasury bonds. If we look at the market today, traders have pushed the ten-year U.S. Treasury yields to a fresh seven-year high, clearly another alarming sign. Another important issue here is that if the PBOC stops defending the currency from devaluation, the Chinese Yuan could easily break the level of 7.
Time for traders to turn to gold’s haven?
The precious metal has a history of strong performance in times of serious risk to the financial markets or global economic growth. The renewed risk off appetite is supporting gold to some extent but we haven’t seen any strong moves yet. But one element remains clear; worsening financial conditions, trade war and the heightened tensions between Italy and the EU are likely to continue to support the gold price in the long run. I do think that given the growing landscape of uncertainty, the gold price at its current level is an attractive opportunity for traders.