Global market decline highlights fragile economic balance, says economist

The sharp decline in international stock indices earlier this week served as a reminder of the fragile economic balance on the global stage, according to economist Tassos Yiasemides.

Speaking to the Cyprus News Agency (CNA), Yiasemides delved into the primary factors that led to the downturn, which has raised concerns about a potential new recession in the United States, with possible repercussions for the global economy.

Specifically, the significant drop in global stock markets on Monday, which was also evident by the drop witnessed on the Cyprus Stock Exchange (CSE), was accompanied by a fall in commodity prices and sparked fears of an impending recession in the US.

Despite a notable recovery in Japan’s stock market and other Asian markets on Tuesday, which is expected to stabilise European and American indices, concerns continue to persist.

“The drop in stock indices on Monday was a reminder of the fragile economic balance on the international scene,” Yiasemides said during the interview.

He added that “nearly all stock indices are reacting positively today (Tuesday), which may have been anticipated”.

Cryptocurrency markets also experienced a substantial decline, which Yiasemides said was expected.

“Investors tend to withdraw from higher-risk markets during ‘crisis’ periods in order to protect their capital,” he explained.

Yasemides attributed the market downturn to several key factors, including recent statistical data from the US economy and the escalating situation in the Middle East.

He mentioned that statistics concerning the major European economies have also been unfavourable, with the German economy shrinking by 0.1 per cent.

Specifically, Yiasemides highlighted that in the US, economic data indicated a decline in manufacturing activity for the fourth consecutive month, while job creation and availability were significantly lower than expected, signalling a potential downturn in business activity.

He also said that the half-year results for many American banks, particularly those involved in technology, were disappointing.

“This demonstrates the significant interconnection between global economies and the scale of the challenges, while it is evident that financial markets are no longer able to calmly digest negative events,” Yiasemides observed.

The Cypriot economist also discussed the implications of delayed interest rate cuts in the US, noting that investors appear hesitant to invest in improving economic conditions.

“This has led to growing expectations that the Federal Reserve might reduce interest rates by 0.50 per cent in September instead of the initially expected 0.25 per cent,” he stated.

He also speculated that the European Central Bank (ECB), considering the current economic indicators for the Eurozone and the trajectory of inflation, might resume lowering interest rates.

Another factor contributing to market instability, according to Yiasemides, was the Bank of Japan’s decision to raise interest rates by 0.25 per cent to support the yen and tackle rising inflation.

He said that Japan’s central bank had previously not followed the rate-hiking policies of other central banks.

Furthermore, Yiasemides pointed out that according to reports in the foreign press, the market decline might also be linked to the closing or unwinding of carry trades—borrowing in low-interest currencies like the yen and Swiss franc and investing in higher-yielding assets.

Adding to the market instability is the growing tension in the Middle East, which is causing uncertainty in the region and raising concerns about the potential expansion of conflicts involving Iran and other Arab countries.

“The destabilisation and uncertainty created cause significant problems, even if there is no escalation in hostilities,” Yiasemides said.

“Many investments may be cancelled, many trips postponed, and problems in international trade are likely to intensify,” he added.