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Is a Recession Coming?

How many recessions have you experienced in your lifetime? One, two, possibly three? 

A recession is a natural part of economics, and certain economists believe that recessions are a 7 to 10-year economic cycle. Inflation increases, wages do not keep up, poor investments and banks over-lending to individuals unable to actively keep up with payments, all of which eventually lead to an economic recession. 

However, recessions in the past, such as the banking crisis of 2008 or the great depression, have all been due to economic misjudgement and misuse. Each recession seems to be witnessing slightly better conditions than the previous, as the Central Banks learn from previous mistakes and experiences. 

However, we are yet to have an economic recession due to a health crisis! 

 

How are our governing bodies, mainly the central banks coping with today’s crisis? 

So far mainly via the following:

 

  • Lowering interest rates 
  • Quantitative easing programs
  • Loosening Fiscal policy

 

As the banks seem to be acting early to support business and industries, we are still seeing economies crumble and the stock markets crash. But is the coming recession due to the Coronavirus, or has this crisis simply brought forward a recession which was already coming? 

Looking at the main players amongst the western central banks (ECB, Federal Reverse and Bank of England), all have had issues with underachieving economic growth even before today’s crisis. 

The Federal Reserve cut interest rates 3 times, the UK’s monetary policy committee members started voting for lower interest rates just before Christmas, and the ECB failed to reach interest rate targets due to continuously failing to reach its inflation goals. 

 

Therefore, with a recession looming and the stock and commodities markets crashing, what options do investors have besides the low performing bond and saving account markets? 

There are many assets to which traders can turn to, that tend to hold their value during times of crisis. For example, many traders turn to the Swiss Franc (CHF) which is classed by some economists as a Safe Haven.

So why does the CHF hold well during Recessions? The country’s strong and steady economy is the first reason that comes to mind. Despite being hit by the many crisis that have rocked the world’s financial markets, Switzerland has always managed to hold firm without too much trouble. 

Another important factor is the country’s relatively low level of national debt. While most of the world’s top 10 economies have debt ratios of around 100% (or sometimes more), Switzerland’s is less than 30%

Like all countries with a strong currency, Switzerland is very attractive to foreign investors, creating a virtuous circle that makes its currency even more valuable. This is also due to the fact that in 2016, the SNB decided to abandon its cap in order to strengthen the Swiss franc, which was falling slightly against the dollar and yen at the time.

Of course, the swissie (as it is often called in the financial market), isn’t the only safe haven that investors tend to seek refuge in during times of market uncertainty. But, while some have the tendency to protect investments, others can get in a certain negative range, many times due to it being over-traded, as it was the case for Gold, the previous days. If you want to get a chance to better understand the market movements, make sure to follow our webinar series

 

Stay tuned, for more trading insight!

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage

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