Trading sessions will continue to take place in the financial market in many negative bond yields, which may lead to constant fluctuation of cash flow in investment channels.
Fluctuations in 2019
There were many fluctuations and new records set in 2019 when the US stock market consistently hit historical peaks and a series of surprising events rocked the financial market. Specifically, bond interest rates were reversed, and tightening monetary policy to loosening of monetary policy was applied by Central Banks around the world. The US economy and the US stock market had a phase of more than 3,900 days in the second longest “Bull Market” term in history.
Except for the United States, the rest of the world, including China, saw growth continuously decline, reaching the lowest level in the past thirty years. Moreover, many organizations such as the World Bank (WB) and the International Monetary Fund (IMF) expect the world's No. 2 economy to continue to slow down until 2030. In some developed countries in Asia, like Japan and South Korea, the situation is not getting any better. Many European countries are also seeing a proclivity to recession with a growing indication of a worsening economy. The PMI index of many regions is below 50 points or fluctuating around that level, showing a clear sign that the economy is rapidly shrinking.
In addition, the inflation target has not been reached yet, causing central banks to change their views. Specifically, after a long phase of pouring money to deal with the economic crisis in 2008, the central banks had to tighten monetary policies from 2016 to the end of 2018. However, this trend was completely reversed, with loosening of monetary policy along with more than 140 interest rate cuts by central banks from the beginning of 2019 to now. Some central banks, like the US Federal Reserve (Fed), implemented these cuts 3-4 times. Besides, interest rates in some countries such as Korea and Thailand recorded the lowest level, and even reached negative rates.
Data from the world's top financial broker XTB, located in Europe, showed that the US stock market and safe investment channels such as gold, USD, Japanese yen (JPY), and the Swiss franc (CHF) attracted a strong cash flow for fear of a sharp increase. More noticeably, the Thai Baht (THB) also recorded a high increase compared to the stronger currencies above, and more and more cash flow is pouring into safe investment channels like gold. While government bonds that didn’t fluctuate for years, have now suddenly become "bright stars" for attracting cash flow.
Trend of cash flow in 2020
As the world's strongest economy, the US stock market has an eleven-year phase of price increase, and this has caused many concerns for investors. However, nothing can constantly keep going upwards and not fall or correct at some point. Therefore, the cash flow has moved towards safe investment channels recently. In addition to bonds, gold also is attracting a large amount of cash flow.
According to figures from the World Gold Council (WGC) and Capital Economics, the central banks bought about 375 tons of gold in the first half of 2019. For this, 675-725 tons of gold is expected to be bought for the whole year, achieving the highest level in the past 60 years. In addition, by the end of the third quarter of 2019, investment funds, specially ETFs, held more than 2,800 tons of gold, reaching the highest level of all times. This group also purchased nearly 370 tons of gold in the first three quarters of the year. According to Capital Economics, all such investors have no intention of selling off gold in the market.
Apparently, the stock market is facing high risk in spite of a sharp increase last year. However, liquidity in the US stock market is low although its indices have continuously increased. Specifically, S&P 500, including many shares of the world’s leading companies, cannot avoid the risk of liquidity. In the third quarter of 2019, this index showed that more than 50% of shares in trading session were valued at around USD 150 mn. This sounds like a huge amount of liquidity, but in reality, such liquidity is only small scale from investment funds.
More worrisome is the US stock market with low liquidity, causing other markets to face higher risks as a result. In particular, statistics indicate that computer-based automated transactions are becoming increasingly dominant, accounting for about 80% of daily transactions. This can increase the fluctuation in the stock market, pushing risks up while prices fall.
In a real life situation, focusing on financial management and good risk management, as well as capturing the trend of cash flow, will be the leading factor for investors to gain most benefits.