Bullish to hellish: Is global economy cruising in danger zone?

Central banks have played the gods till now. They did lend more than a helping hand when the stock market traders sought protection from the market of Chinese dragon, which may unleash more than its worth in the coming days.

As of now, the situation seems to have got a breather. But, sooner than later, global market that has been long overdue for correction will take its recourse. This time around, almost all continents will suffer the brunt of this crash.

The investors all along knew this was coming. When it actually did, the effect wasn’t less difficult than what it would have been, had it happened unexpectedly.

Global market has broken, and broken bad. China, the second largest economy in the world, has been at the forefront of this global crash. And, it’s not like China can help it either. The Chinese stock market bubble began to burst in early June this year and has been consistently spiraling out of control often. When the crash is complete, a lot of countries including the US and UK will go down this drain.

On Monday, the benchmark Shanghai Composite closed 0.8% lower, having slipped almost 3% since the early trade. In the last two weeks, markets have seen a lot of bloodbath in China sending out danger signals in the global markets. Cue well taken, but is there an immediate solution?

It doesn’t look like the markets would recover in the immediate future because even on Monday – two weeks since the nosedive started – there weren’t any hopes left. Markets showed no positive signs of breathing good.

Though, in markets such as the US, the Fed Reserve gave away some goodies to protect the investor sentiment, and assured the cost of borrowing will remain at rock bottom. After a brief wobbly walk, and a dark day in the markets they did recover for a brief while. But, the Chinese market would ensure this doesn’t stay strong for too long.

In early 1990s and 2000s, America had experienced similar phase. And this time, it was happening in faraway China. The ‘Greenspan Put’ as it is famously called, had offered some solace to American markets with some interest rate cuts, thus helping the economy get some fresh air.

Financial analysts can easily point out what caused the crash. There is simply so much cheap credit that has invaded the market, that a bubble bursting is the most inevitable thing to happen to undergo a course correction.

The US Fed Reserve has pumped the market with $4.5 trillion since 2008. The Bank of England seems to be better off since it simply read the signs and stopped after putting in £ 375 bn. Bank of Japan seems to be clinging on to hopes that the market pumped with more credit is a healthy market. Hence, Japan has channeled a post-crash stimulus package of $700 bn a year, with a Frankfurt based bank European Central Bank doing almost the same.

All the countries, for which China happens to be the manufacturing hub, are riding on a bubble that can go bust anytime despite the credit oxygen it has been pumped with.

Reason being, China itself has been borrowing heavily to keep its markets on an upswing. And it is running out of steam, which will conclude sooner than later.

China has cut interest rates and hiked the borrowing limits. Smaller companies’ shares have been bought by Chinese administration in order to keep the market breathing good.

However, Chinese shares slipped again on Monday and the days ahead don’t look very bright either. Investor sentiment now isn’t just cautious but it has gone into the dark phase with no enthusiasm witnessed in the segment. Though there are reports that Chinese authorities will intervene less in the market, unlike before, the markets have not warmed up to this news.

Japan has posted weak data, with country’s factory output coming down by 0.6% in July compared to previous month.

Financial analysts and experts, however, are trying hard to see a silver lining around this dark cloud. Some of them have been encouraging investors to buy more stocks and shares stating this are the best opportunity to buy which surfaced in many years.

Even Britain has been warned of a potential crash, though the markets aren’t so much in the red, for reasons that the recent growth has not been ‘organic, systematic and healthy’. The unbalanced nature of the growth and global cues can actually trigger off a reaction that’s leading towards a panic situation, than the opposite.

The markets falling can send countries into a dizzy hampering much more than just money. Hopefully, countries will take a scientific step to ease the situation than an emotional one.

(Image: Reuters)