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Q&A: The global stock market sell-off explained

Wednesday saw the beginning of a slump in stock market values worldwide, but what is behind the declines?

:: Why are stock markets falling?

The main reason for the steep falls is because the US Federal Reserve, the country's central bank, has indicated that it will raise interest rates in the world's largest economy more rapidly than expected.

That means higher borrowing costs for US consumers and businesses, which could lead to a slowdown in the economy and, for companies with high debt levels, lower profits as their interest repayments rise.

The Fed has raised interest rates three times so far in 2018 and has indicated there will be at least one more increase before the end of the year.

Jerome Powell, chairman of the US Federal Reserve, said there would be four rate hikes in 2018.
Image: Jerome Powell, chairman of the US Federal Reserve, has said there will be four rate hikes in 2018

:: But why should that hit markets elsewhere?

Higher US interest rates suck money out of other assets around the world and back into US assets – depriving other economies of capital.

That is a particular worry for some Latin American economies, for example, if investors demand a higher premium for putting their money there rather than in US assets.

In addition, a lot of borrowing in emerging markets is denominated in US dollars.

When US interest rates rise, the dollar becomes more attractive to hold, while other currencies fall in value in relation to the greenback.

In emerging markets, when the dollar rises, then the cost of servicing and ultimately repaying that debt goes up (when expressed in their local currency) for people, businesses and governments who have borrowed in dollars.

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:: Anything else?

There are an awful lot of things for investors to be concerned about just now.

The biggest thing keeping investors awake at night is the risk of an intensification in the trade war between the US and China.

It has exacerbated fears that the rate at which the Chinese economy is growing has slowed down.

That is bad news, for example, for the mining companies that sell China the raw materials that power its economy or for German manufacturers who supply Chinese industry with machine tools.

It's also terrible for countries like Vietnam that have a very close trading relationship with China. Other factors of concern to investors are the risk of a "no-deal" Brexit, signs of a possible clash between the EU and Italy over the latter's refusal to set a responsible budget, and the US midterm elections.

But the relationship between the US and China is the biggest concern.

And, overlaying all that, is the inexorable rise of debt. The International Monetary Fund's latest report reveals that global debt stood at $182tn (£137tn) at the end of 2017, representing a 50% increase over the past decade.

If other economies raise interest rates like the US – or even start to withdraw the fiscal stimuli put in place after the financial crisis – that raises the cost of servicing and ultimately repaying debt for a lot of borrowers.

Traders at the New York Stock Exchange in September 2008
Image: The current bull market in equities is now in its 10th year in both the US and Europe

:: Was some kind of sell-off inevitable?

Absolutely. Another very important factor to bear in mind is that we are now at the end of a very long running cycle in which stocks have risen inexorably upwards.

The current bull market in equities is now in its 10th year in both the US and Europe. At some stage, a correction was inevitable. It is no surprise whatsoever that the most violent falls in stocks in recent days have been in stocks that have enjoyed the most spectacular gains, most notably US tech stocks like Apple and Amazon, but also the likes of Fever-Tree Drinks in the UK, which has lost a third of its market value during the last week.

:: What's been happening in the bond markets?

The bond market is readjusting its expectations of US interest rates.

Yields (which rise as the price falls) on 10-year US Treasuries have surged from 2.853% at the end of August to as high as 3.261% earlier this week.

To put that in context, US 10-year yields have not been that high since May 2011. US Treasuries have a particular impact on the US housing market because most US mortgage rates are priced off, and move in response, to bond yields. Higher bond yields have a knock-on effect to the so-called "real economy".

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Image: US corporate profits are strong – partly because of Mr Trump's tax cuts

:: Donald Trump has said the Fed is "crazy". Is he right?

Not really. The US economy is on a tear and US corporate profits are strong – partly because of Mr Trump's tax cuts, which led a lot of American companies to bring money back to the US that had been kept offshore.

Unemployment is at just 3.7% – a level barely seen in the last half-century. The US economy grew at an annualised rate of 4.2% in the second quarter of the year. The Fed is acting perfectly rationally in assuming that raises a risk of higher inflation and raising the cost of borrowing accordingly.

:: What's the relationship between bonds and stocks?

Normally, bond and equity markets have an inverse correlation. If stocks are in demand, investors will tend to switch from bonds to equities, sending bond yields higher. If stocks are out of favour, investors tend to switch out of equities and into bonds, sending yields lower.

HUAIBEI, CHINA - JANUARY 13: (CHINA OUT) An investor observes the stock market on his phone at an exchange hall on January 13, 2016 in Huaibei, Anhui Province of China. The Chinese stock market was volatile on Wednesday as the Shanghai Composite Index dropped 73.26 points, or 2.42% to 2,949.60 points and the Shenzhen Compposite Index tumbled 314.88 points, or 3.06% to 9,978.82 points. (Photo by VCG/VCG via Getty Images)
Image: It's rare to see both stocks and bonds falling at the same time

:: Hang on – recently we've seen both stocks and bonds falling?

You've put your finger on one of the most worrying aspects of the recent shake-out in markets.

It's rare to see both stocks and bonds falling at the same time. Potentially it could hurt investors who have sought to diversify risk.

Bond yields rising is usually a sign that the economy is growing strongly, that investors are putting their money into stocks instead and that interest rates are set to rise in response to higher inflation.

This increase in yields is more reflective of the fact that the US budget deficit is starting to increase (partly thanks to Mr Trump's tax cuts) and so US investors may be demanding more of a premium to hold US Treasuries.

That said, US Treasury yields have eased back during the last couple of days as stock markets have fallen, suggesting the relationship is reverting to normal.

:: OK, now I'm really scared.

If you want to be really scared, take a look at Mr Trump's track record.

In business, he liked to borrow a lot, describing himself during the 2016 presidential campaign as "the king of debt".

On at least four occasions during his business career, when debts threatened to overwhelm his businesses, lenders were forced to take a haircut on their loans to him.

Since becoming president, Mr Trump has shown a willingness to adopt tactics he used in business, such as an aggressive approach to haggling over trade deals and taking an "I win, you lose" approach rather than the traditional attitude to free trade deals which is that everyone wins.

Reneging on the US national debt would be a logical progression – albeit a terrifying one given that US Treasuries are the most widely-held asset in the world.

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Would Mr Trump dare do that? Well, in May 2016, he said this to CNBC: "I would borrow knowing that if the economy crashed, you could make a deal. And if the economy was good, it was good, so therefore you can't lose. It's like you make a deal before you go into a poker game. And your odds are much better."

No one is suggesting that Mr Trump is going to walk away from America's debts. But the thought that he might is starting to fray a few nerves.

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Firms to launch Brexit contingency plans before Christmas

The majority of British businesses are preparing to launch contingency plans before Christmas as hopes of a Brexit deal fade.

A survey of 236 firms for the Confederation of British Industry (CBI) found that many will make "damaging" moves which will include cutting jobs and relocating work overseas.

The survey focused on companies employing fewer than 500 people and it found that 82% of firms will start to implement their contingency plans by December if the Brexit process does not get any clearer.

The news comes as fears grow that the UK could leave the European Union in March without a deal, resulting in tariffs on exports, border checks and travel restrictions.

Carolyn Fairbairn
Image: Carolyn Fairbairn is director general of the CBI

CBI director general Carolyn Fairbairn said the situation was "urgent", adding: "The speed of negotiations is being outpaced by the reality firms are facing on the ground.

"Unless a withdrawal agreement is locked down by December, firms will press the button on their contingency plans.

"Jobs will be lost and supply chains moved.

"The knock-on effect for the UK economy would be significant: living standards would be affected and less money would be available for vital public services including schools, hospitals and housing."

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She said the uncertainty was "draining investment" from the UK, adding: "From a multinational plastics manufacturer which has cancelled a £7m investment, to a fashion house shelving £50m plans for a new UK factory, these are grave losses to our economy.

"Many firms won't publicise these decisions, yet their impact will show in lower GDP years down the line."

According to the CBI, 80% of companies said Brexit had already had a negative impact on their investment decisions, more than double the 36% that said the same a year ago.

Two-thirds said Brexit had affected how attractive the UK was to investors. One in four said it had no impact.

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Image: A number of industries could be affected if there is no Brexit deal

Last week's summit between prime minister Theresa May and Europe's leaders made little progress towards a deal and a second summit in November has been called off.

The next meeting is scheduled for December but, even if a deal is reached, there is no guarantee that parliament will approve it.

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A spokesman for the Department for Exiting the European Union said: "We are working hard to deliver a deal that works for businesses and remain confident of a positive outcome.

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"In the unlikely event we leave the EU without a deal, we have issued over 100 technical notices to help businesses make informed plans and preparations.

"We have engaged extensively with businesses and industry bodies from all sectors of the economy throughout the exit process and will continue to do so."

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Police found the remains of 63 more infants and fetuses at a second funeral home in Detroit

  • Detroit police found 63 remains of infants and fetuses at a funeral home — just days after discovering the remains of 11 babies at a separate funeral home.
  • Police Chief James Craig told reporters he couldn't say with certainty that the incident was isolated to just two funeral homes. "This is much larger than we might know," he said.
  • Investigators originally found the remains of 11 stillborn babies concealed in a funeral home's "false ceiling," after they received an anonymous letter tipping them off.

Detroit police on Friday announced they had found dozens more remains at a funeral home just days after uncovering the corpses of 11 infants concealed in the ceiling of a separate, defunct funeral home.

Authorities said they found remains of 63 infants and fetuses at the Perry Funeral Home, 36 of which were found in boxes and 27 in freezers.

"This is deeply disturbing," Police Chief James Craig told reporters at a press conference. "I am committed to get to the truth. I'm committed to following the evidence."

Craig said the police department's phone was "ringing off the hook" since the original discovery of 11 remains last week, adding that it's possible there are more remains at different establishments yet to be found.

"I would like to look at you and tell you I hope not," Craig told one reported. "I hope that it is isolated to these two. I can't say that with certainty. So this is much larger than we might know."

The Michigan Department of Licensing and Regulatory Affairs said Friday it suspended the mortuary science licenses of Perry Funeral Home and its director, The Detroit News reported.

The original discovery of 11 corpses came after authorities received an anonymous letter tipping them off about the Cantrell Funeral Home, which had been closed for months due to "deplorable conditions," according to The Detroit News.

Investigators then reportedly found the remains of 11 stillborn babies concealed in a "false ceiling" between the first and second floors of the building. Nine of those infants' bodies were in cardboard boxes, and two were inside a trash bag, which in turn was inside a infant-sized casket.

Craig said Friday that the investigation into the second funeral home came after authorities received a second tip from a parent who had heard a media report of the first discovery of remains.

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I’ve traveled to more than 30 countries, and here are the dumbest mistakes I made on the road that I’ll never make again

  • In March, I left New York to travel around the world as Business Insider's international correspondent. In total, in my life, I've traveled to 30-plus countries.
  • While traveling I've made tons of dumb mistakes that I'd like to avoid in the future. Everything from getting pickpocketed in the Mexico City metro to getting tricked by a fake taxi.
  • Learn from my mistakes and save yourself some aggravation.

The idea that travel is an adventure is one of the oldest clichès in the book. But, it's a clichè because it's true. And, on adventures, things go wrong. Often.

I've made so many mistakes while on the road that it would be impossible for me to recount them all. I've worn the wrong footwear on hikes and ended up with blisters as big as my heel. I've been pickpocketed not once, but twice. I've taken a metro in the wrong direction a dozen times. The mistakes never end.

But that's also what I love about travel: the constant sense of exploration, of trial and error, of sketching out new terrain on your mental map.

Below, I've collected as many of the mistakes as I can remember that I've made while traveling. There are a lot. Perhaps you'll learn from my mistakes and save yourself some aggravation.

SEE ALSO: I traveled the world for 6 months, and here's the single best piece of advice I can give you for any trip you take

DON'T MISS: I've been traveling the world for 6 months, and I've found real life doesn't always live up to the hype. These are the most disappointing places I've been.

1. I forgot to print out my boarding pass before getting on a budget airline. I had to pay $34 to print out my boarding pass at airport check-in.

I've been traveling the world for 6 months, and I still made an expensive budget airline mistake that should serve as a warning to anyone»

2. In Bali, I made the mistake of wearing flip-flops while driving a scooter bike. When my hand slipped on the throttle with my foot on the ground, it dragged and I ended up with a nasty cut.

3. On my last night in Tokyo, I decided it was a good idea to spend the night out drinking at an izakaya and singing karaoke. I woke up in a stupor, barely made my 8 a.m. flight, and was nauseous for the entire 13-hour flight to New York.

A little-known travel app that is Airbnb-meets-Tinder helped me have the wildest night in Tokyo partying until sunrise»

See the rest of the story at Business Insider

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The Saudi government reportedly targeted and punished several dissidents after McKinsey identified them in a report

  • The Saudi government targeted and punished several dissidents after the American consultancy firm McKinsey & Company identified them in a report as critics, The New York Times reported.
  • McKinsey reportedly created a nine-page report gauging public response to Saudi austerity measures announced in 2015, and found that three dissidents had a major influence over negative coverage on Twitter.
  • One of the dissidents was arrested, another was hacked and had two brothers arrested, and a third, anonymous user's account was shut down, The Times reported.

Several dissidents were targeted by the Saudi government after a report from the American consultancy firm McKinsey & Company identified them as having a heavy influence over social-media criticisms of Saudi austerity measures, according to The New York Times.

McKinsey reportedly created a nine-page report measuring the public's response to austerity measures announced in 2015, and found that there was twice as much coverage of the measures on Twitter than on other news platforms, and that the coverage was overwhelmingly negative.

The McKinsey report, obtained by The Times, found that three people were particularly influential on Twitter, including Khalid al-Alkami, a writer; Omar Abdulaziz, a Saudi critic who lives in Canada; and an anonymous user identified as Ahmad.

Following McKinsey's report, Alkami was reportedly arrested; two of Abdulaziz's brothers were arrested, and the government hacked Abdulaziz's phone; and the Ahmad account was shuttered.

A McKinsey spokesman said in a statement to Business Insider that the report was not created for the Saudi government, used publicly available information, and was intended primarily for an "internal" audience.

"We were never commissioned by any authority in Saudi Arabia to prepare a report of any kind or in any form to identify critics. In our work with governments, McKinsey has not and never would engage in any work that seeks to target individuals based on their views," the spokesman said.

He continued: "We are horrified by the possibility, however remote, that it could have been misused in any way. At this point, we have seen no evidence to suggest that it was misused, but we are urgently investigating how and with whom the document was shared."

The news comes amid international uproar over the death of Washington Post journalist Jamal Khashoggi, whom the Saudi government acknowledged Friday was killed in a consulate in Istanbul, Turkey. Khashoggi had frequently criticized the Saudi government and Crown Prince Mohammed bin Salman in his columns.

Khashoggi's death, which the Saudis have said occurred after a physical altercation, has highlighted the Saudi government's attempts to quash dissent and silence critics, and shone a spotlight on the companies and governments who have aided the regime.

SEE ALSO: Here's everything we know about the troubling disappearance and death of Saudi journalist Jamal Khashoggi

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The CEO of Silicon Valley DNA testing startup 23andMe shares the health product she hopes to sell next

  • Anne Wojcicki, the CEO and founder of Silicon Valley's most popular genetics testing startup, 23andMe, said this week that she hopes the company expands its current health offering lineup.
  • 23andMe, which made headlines recently on the heels of a new $300-million partnership with drug giant GlaxoSmithKline, currently offers health screenings for some of the genes involved in breast cancer, Alzheimer's, and Parkinson's.
  • On Tuesday, Wojcicki said she hopes to add a new health offering that looks at how you process medications including those for depression.
  • Albertsons pharmacies and gene testing startup Color Genomics currently offer that kind of test for $250-$750, but many scientists say it's not worth the money.

Anne Wojcicki, the CEO and founder of popular Silicon Valley gene testing company 23andMe, doesn't feel like the company is currently offering what she called a "complete product."

That's because the current gene testing kit — which includes health screenings for some of the genes involved in Alzheimer's, Parkinson's, and breast cancer — does not include a test that looks at how you process medications including those for depression.

Those DNA tests, which assess genes involved in the break down of antidepressants in the body, are currently being offered by psychiatrists and Albertsons pharmacists in three major cities at a hefty price tag of $750. Just last month, another Silicon Valley genetics testing startup called Color Genomics began offering the test as part of its $250 kits.

And on Tuesday at a conference organized by Rock Health, one of Silicon Valley's premier health-tech funding groups, Wojcicki said she hoped her company could include that kind of test in its product lineup soon.

But many scientists feel the tests don't offer a clear benefit to people and in some cases are not worth the money. Among other issues, the tests may give conflicting results to the same patient for the same medication and don't tell providers which specific medication is best, according to experts.

'When we can bring pharmacogenomics back, then we have a complete product back'

23andMe kitIn the early days of 23andMe, the company included a test for depression medications in its lineup of health offerings, Wojcicki said. But in 2013, the Food and Drug Administration forced the company to stop selling those products and get federal approval on the grounds that the tests could be misinterpreted as health advice. The company was allowed to continue selling the genealogy component of its kit, which looks at ancestry.

Last year, the FDA gave the company the green light to again sell some of its health screenings. On the heels of that decision, 23andMe rolled out a limited selection of some of its original products. The most recent addition, unveiled in March, is a test for some of the genes involved in the risk of developing breast cancer, also known as BRCA genes.

Now, the company is only missing one of those original health products, Wojcicki said: a test for depression medications, also called pharmacogenomics.

"The only one we don’t have back yet is pharmacogenomics. We used to have that and we’d like to have that one come back," Wojcicki said on Tuesday at a panel discussion at the Rock Health Summit in San Francisco.

“When we can bring pharmacogenomics back, then we have a complete product back," she said.

It remains to be seen how the company would roll out such a test. Because 23andMe sells its tests directly to people (they can be purchased online and at a selection of drug stores), it would need to get FDA approval before selling an additional health product. The test could be incorporated into the existing health lineup, which currently includes tests for Alzheimer's, Parkinson's, and breast cancer for $199, or it could be sold as a stand-alone test.

Color Genomics chose to incorporate its new pharmacogenomics product into its existing $250 test. Unlike 23andMe, which sells its services directly to consumers, Color requires people to order their tests through a medical provider. In addition, the company mandates talking with a professional genetics counselor and a clinical pharmacist to avoid potentially dangerous misinterpretations of the results.

Genomind and Assurex, the two companies who offer a standalone pharmacogenomics product, sell the test through psychiatrists and some pharmacists for $750.

Wojcicki did not provide further details on how much the test — should the company ultimately choose to offer it — would cost or when it would be available. A company representative also declined to offer Business Insider more information about the test. But Wojcicki said she saw the pharmacogenomics service as part of the company's overall mission to help empower customers with more data about themselves and prevent negative health outcomes when possible.

"I think one thing genetics can do is help prevent a lot of early deaths," Wojcicki said.

SEE ALSO: DNA tests that cost as much as $750 claim to tell you which antidepressant is best for you, but scientists say they're not worth the money

DON'T MISS: DNA-testing company 23andMe has signed a $300 million deal with a drug giant. Here's how to delete your data if that freaks you out.

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