Global Financial Market Turbulence: Factors and Risks

Abstract

In the last few months, the global economy has been faced with growing risks primarily emanating from the state of the world’s two largest economies and their policies. One of the main factors behind the current turbulence in global financial markets is the destabilizing expectation that the US Federal Reserve is going to toughen its policy stance. The ongoing decline in unemployment and the steady rebound in business activity have created preconditions for a rise in the US Federal Reserve’s key interest rate. As far as the developing economies are concerned, the most likely result of this decision will be an increase in the rate of capital outflow and a new wave of currency depreciations. The second and maybe even more important factor is China’s continuing deceleration in economic growth, the collapse of its stock market and the unexpected devaluation of the Yuan.