The Strong Showing of Anti-EU Forces in Germany Could Trigger a Stock Market Crash
The outcome of the German elections could shake the international markets in the medium- and long-term. Angela Merkel has secured a fourth mandate to lead the German nation. But in the eyes of investors, the continuity and stability of Europe’s largest economy is in peril. Merkel won, but the far right “Alternative for Deutschland” (AfD) party in Germany has scored major points. It shows that the anti-European Union parties are getting stronger in the one country that has benefited most from the eurozone! It’s also a warning sign that a major stock market crash is coming.
Wall Street may not have noticed yet, but it will. Because if Germany leaves the EU or experiences a fallback to the hard right, the EU won’t last and the global economic system will suffer. The outcome of the German election was the kind that could spell the end of the bull market in Europe as well as the United States.
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There are two basic reasons for this.
On the one hand, the German elections are just another item in the long list of international risks, along with the tension between the U.S. and North Korea and the possibility of a nuclear war. And the markets have yet to account for the rising international risk.
Questions of kneeling football players have occupied Trump in recent days, but the emphasis he places on that may simply be an effort to distract Americans from the harsher realities of the world. After all, Trump is a businessman at heart. He has no interest in stressing the kinds of risks that could bring the house of cards that is Wall Street now crashing down.
Wall Street Doesn’t Have a Shield Against International Risk
The Dow Jones and the U.S. economy, in general, have already shown to be vulnerable to international risks. Shareholders reacted swiftly in early September as Kim Jong-un and Trump traded nuclear-sized threats. The markets have recovered.
As investors realize the risk of a more euro-skeptic Germany in the next few weeks, investors may decide to engage in a little profit-taking. But profit-taking, given the precarious nature of valuations, sustained solely by speculation, can cause a massive crash. This is the second potential trigger event for a market crash.
Indeed, the global financial markets should have raised your suspicions months ago. If you weren’t worried before, you’re free to start fretting now. Expectations for another Fed rate hike in December are going up. The Fed must be worried by the unstoppable rise of stocks—without corresponding earnings to justify it—as much as anyone.
It will try to slow the bull down, and a rate hike is as good as any bullfighter’s red flag in the corrida. The Bank of England is under pressure to raise rates, and the European Central Bank (ECB) is also preparing to announce a plan at its October meeting to begin reducing its Quantitative Easing plan, starting probably next January.
The rate hikes aren’t simply going to hurt stocks. They will affect most businesses. The biggest risk might be described as a debt trap. Several companies could fall, given the extent to which many have taken on loans at low rates, never apparently expecting that interest rates would eventually have to go up. When it happens, there’s a strong possibility they won’t be able to repay them. And that’s just where central banks in the West are concerned.
In fact, there is another menace, which could come from the East. Chinese investors and companies have taken on several debts have been contracted in U.S. dollars. This could create a few problems in the event of an increase in the cost of borrowing in the U.S.
Meanwhile, nobody knows why inflation remains stubbornly low, despite the recovery in global growth and continued monetary stimulus. This is the biggest mystery; it suggests that the economy is not functioning according to any logic any longer.
The absurdity stems from the fact that since 2012, the central banks have injected so much liquidity. It’s impossible that it has failed to produce inflation. This paradox is just one of the many contradictions and risks that are swimming like sharks in the economy. They’ve been tame so far. Yet, their full aggressive nature is about to show itself, taking a huge bite out of the bull market.
