Lehman Brothers collapsed ten years ago. The event had historical, seismic repercussions on other institutions and triggered the markets spiraling into one of the worst financial crises. Now, a decade later, predictions start to appear as when the next crisis will hit again.
JPMorgan Chase & Co, one of the most well-known U.S. global banking institutions, is saying it’s going to be relatively soon – in fact, two years from now. According to their strategists, investors and other market participants should get ready to see another financial downturn in 2020.
The JPMorgan model calculates outcomes based on the length of the economic expansion, the potential duration of the next recession, the degree of leverage, asset-price valuations and other inputs. This time, the financial crisis could be less painful, says the model.
The bank predicts US stock markets will lose about 20%, which would bring the SP500 index to 2,300 USD. These are levels seen in February 2017. It doesn’t sound like a big deal as the stock market has been moving higher for many years without a significant correction.
JPMorgan also predicts a 35% decline in energy prices, along with a 30% drop of base metals. Moreover, U.S. corporate-bond yield premiums could jump about 1.15 percentage points.
What could be the biggest issue in the next downturn are the emerging markets. Strategists at JPMorgan said that emerging markets stocks could lose nearly half of their value, should another financial crisis happen. Not least, emerging markets bonds are due for a 15% correction, which would push their yields sharply higher.
The bank outlines one of the main reasons for the next crisis: the Fed’s tightening cycle, which is absorbing liquidity from the markets. This cycle has led to a shift from active to passive investing, across all the asset classes. Therefore, a quick scramble for liquidity could lead to severe repricing on the markets, which usually occurs when there are more sellers than buyers, i.e. in times of panic.
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The emerging markets are already feeling the pain of rising U.S. rates: their currencies are losing value nearly every day, prompting central banks to raise rates. However, sharply rising interest rates will cause damage to the economic health of the touched countries, leading to another round of selling of currencies, stocks, and bonds in these regions. Should the Fed continue to raise rates, and it appears it will, we could see another financial crisis sooner than in 2020, and it will probably begin in the emerging markets.
This article was written by Peter Bukov, one of TeleTrade’s leading analysts.
This article was originally posted on FX Empire
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