Recent turbulence in stock markets can be attributed to “gray rhinos”.
“Gray rhino” has become a catchword since early last year, after American writer Michele Wucker published her best-selling book, The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore.
Compared to the term “black swan”, which refers to highly improbable and largely unforeseeable events, gray rhino is used to describe those obvious but often ignored dangers.
Any of these gray rhinos can become a terrible threat to the global stock markets in the worst case.
The most recent gray rhino is the trade dispute between China and the United States. The administration of US President Donald Trump announced a 25 percent tariff on steel and 10 percent duty on aluminum last month, and then said it would levy tariffs on Chinese imports worth US$60 billion.
Beijing responded quickly with a list of tariff targets involving key US exports to China, such as soybeans, cars and aircraft.
Luckily, both sides have left some room for negotiations and have yet to set a timeline for the measures to take effect.
Another gray rhino comes from the tech sector. Trump has been complaining about internet giants such as Amazon, Facebook andGoggle during his election campaign. He had promised to go after them after taking office, and measures would include rolling out new taxes and tightening regulation over personal data.
Facebook’s data privacy scandal, which has affected up to 87 million users, might be the trigger for tougher oversight, and if that happens, it is doubtful if the premium valuation of tech plays can still be sustained.
The US rate hike is the third gray rhino. The Federal Reserve started raising interest rate in December 2015. The Fed has introduced five rate hikes so far, and the Fed fund rate has risen to 1.25 to 1.5 percent at present.
The market is expecting three more hikes this year. However, the current rate remains at an extremely low level, and as such has yet to make any major impact on asset prices worldwide.
The tension in North Korea is another one. A war seemed to be imminent last September when three American aircraft carriers were said to be approaching North Korea.
Thanks to the sudden U-turn in the stance of North Korean leader Kim Jong-un, the situation seems to have been brought under control.
In February, Kim offered a friendly gesture by sending athletes to attend the Winter Olympics held in South Korea.
Kim then visited China and met with Chinese President Xi Jinping, and is scheduled to meet Trump before the end of next month.
Yet, it is too early to say the risk is no longer there. We should keep a close watch on these rhinos.
The full article appeared in the Hong Kong Economic Journal on April 6
Translation by Julie Zhu
[Chinese version 中文版]
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