[Click eStock] "Politics Swaying Economy... Cause of Global Stock Market Crash"

Polyconomy Risk, Increased Volatility in Stock and Forex Markets
"Potential Risk to Expand Financial Market Volatility"

Recently, an analysis from the securities industry identified the cause of the global stock market crash and rebound, as well as volatility in the foreign exchange market, as the realization of 'Policonomy' risk. Policonomy is a compound word of Politics and Economy, referring to the phenomenon where the economy is swayed by politics.

On the day, Park Sang-hyun, a researcher at iM Securities, analyzed, "As the Policonomy phenomenon intensifies, it is delivering a significant shock to the economy and financial markets."

Researcher Park said, "For example, last month, the Trump trade (the phenomenon of money flowing into stocks benefiting from Donald Trump’s election) that surged violently in the financial markets after former President Donald Trump was attacked is also a kind of Policonomy phenomenon," adding, "In hindsight, the weakening of the Trump trade following Vice President Harris’s rise only caused confusion in the stock and bond markets."

Policonomy also lies behind the ultra-strong yen. Researcher Park explained, "the Bank of Japan, unable to ignore pressure from the Japanese government, initiated an early rate hike," adding, "Ahead of next month’s Liberal Democratic Party presidential election, Prime Minister Fumio Kishida needed a shift to yen strength to recover from the low approval ratings caused by the aftereffects of the super weak yen."

He continued, "While the market somewhat expected an early rate hike, after the Bank of Japan’s monetary policy meeting, Governor Kazuo Ueda’s hawkish remarks strongly suggesting the possibility of additional rate hikes poured fuel on the ultra-strong yen," emphasizing, "The market was surprised by these remarks, which reasonably explains the ultra-strong yen and the unwinding of the yen carry trade (borrowing low-interest yen to invest in high-interest assets) crisis."

The Policonomy phenomenon is expected to strengthen rather than weaken. Researcher Park said, "As confirmed in Trump’s presidential campaign promises, major countries’ emphasis on nationalism and protectionism will serve as fertile ground for spreading this phenomenon," adding, "Although the emergence of a technological innovation cycle after the COVID-19 pandemic is fortunate, massive liquidity still determines asset price fluctuations."

He added, "Policonomy risk has greatly increased the possibility of rapidly changing liquidity flows and expanding asset price volatility. Above all, if the economy faces recession risks amid the strengthening Policonomy phenomenon, it is difficult to rule out experiencing financial market volatility unlike any before."