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Are we building up to the next financial meltdown?


Given the buoyant global stock prices the short answer is no. Everything is going up with most major world indices sat on all time highs and the markets are floating towards the usually slow European summer months. Volatility in forex has also been consistently low over the large couple of months with short moves always being countered with retracements into the ranges.

It then seems strange to think that at a time of such a strong bull market in the equity indices that anyone could possibly talk about a financial meltdown. It is definitely a low probability event but there is still risk it could happen. Those of us that have been in the markets for 10 years or more can remember the last financial crisis. It seems very odd to this blog writer that so many people are so forgetful about this after such a short period of time.


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Here are the main reasons everyone should be keeping one eye open for the start of the next financial meltdown.


Geo Political Tensions


It would only take one major geo political stand off to erupt into war for the markets go into panic mode. At the moment, we have many such conflicts bubbling away. In the US the Trump government is weakened by suggestions of Russian meddling. Russia may now not be so happy that they helped Trump win the election only to get hit with fresh sanctions and may retaliate by starting to undermine Trump. In the far east we have North Korea ever closer to nuclear intercontinental ballistic missiles, China seemingly unprepared to stop them and increasing trade with North Korea and a US president who is either trying to escalate or de-escalate the problem via twitter. Maybe most worryingly we have a blockade on Qatar by its gulf neighbors as the next stage in escalating Middle East instability. Anyone of these escalating to conflict could be enough to push the world into financial meltdown.


EU & Brexit


In 2008 European governments stood united against the financial crash prepared to take whatever action was needed to avert a crisis. Today the UK stands apart with a lot of unknowns coming from the impending Brexit, Greece and other southern European countries constantly chastised over their previous debts and unable to default or restructure out of them have also built considerable resentment to the European political machine. Recently banks in both Italy and Spain have required bailouts. What’s interesting is in 2008 if a bank was bailed out it was the next leg down on the stock indices the following morning. Now a bank is bailed out and the stock markets rise. Any shock impact of Brexit and it may trigger investors to look more closely at European banks balances sheets and no one really knows what they are still hiding from the last financial crisis.


Government Balance Sheets


In order to swiftly resolve the last financial crisis many governments starting a program of quantitative easing. While in theory if this was done in say just the USA it would have given banks stability, triggered investment spending and devalued the USA out of debt. The problem is almost the entire world followed suit. This neutralized one of the biggest benefits of quantitative easing that a country devalues out of a crisis because if everyone is trying to devalue at the same time instead of anyone succeeding the status quo was maintained. Now all the purchases from quantitative easing are sat on governments balance sheets. If they decide to sell it’s unclear there would be enough private buyers to step in and this could cause a crash. Alternatively, if the world loses confidence in one governments ability to keep buying this may be enough to open the door to some panic selling.


So, what should we all do?


Plenty of traders have made their fortunes in the years between the last financial crisis and now. If traders freeze from fear and can’t trade then there will be no opportunity. A good trader will simply have one eye open for the next crisis and when they see the warning signs tighten up their risk management. The great thing about Forex trading is there is potential profits to be made if the market goes up or down. Traders should just use stop losses to protect against quick movements and in the event of a crisis concentrate on proven opportunities like buying gold or safe haven currencies.


The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.