A global pick-up on the rocks?

Hopes for a global economic pick-up are being dashed by a range of market movements, most particularly the fall in share prices, the drop in bond yields back towards record lows and the pull-back in commodity prices.

In almost all instances where global economic growth is accelerating or downright strong, share prices, bond yields and commodity prices move higher. When markets start moving in the opposite direction, particularly in unison, there are reasons to be concerned. This uniform negativity in market trends spells problems ahead.

Global stock markets weakened again overnight and into this morning. In the past five weeks or so, US stocks have fallen by over 7 per cent on the back on softer economic data, concerns about how the fiscal cliff will be negotiated and a mix of eurozone and geopolitical tensions. It is a similar story elsewhere – in recent weeks, UK and German stocks have fallen over 4 per cent, Japanese stocks are 6 per cent weaker and the Chinese stock market is going sideways having dropped by more than 15 per cent from May.

This momentum is not encouraging.

While share prices have been falling, so too have commodity prices. The broadly based Thomson Reuters/Jeffries CRB index of commodity prices has fallen 9 per cent since the middle of September. This again is not an encouraging sign for global growth with the price falls concentrated in energy (oil in particular) and industrial metals. The price of these commodities rarely weakens so sharply when the global economy is in an upswing.

The downward momentum on commodity prices brings into question a raft of recent data from China, which at face value pointed to a pick-up in activity in October. There is acute doubt about the reliability of the Chinese economic statistics at the best of times, but it is particularly so now when the "better” news has coincided with weaker commodity markets.

The problems in the US were also brought into focus with the release of the minutes from the last meeting of the US Federal Open Markets Committee. These make for sober reading for those expecting or even hoping for a US recovery. The minutes revealed a push for further quantitative easing after the current "operation twist” finishes at year end. This would be an additional easing strategy over and above the recently announced open-ended purchase of mortgage backed securities and must reflect nervousness from the Fed about the structure of banking in particular and the economy more generally.

The FOMC minutes emphasised risks to the US from a weak global economy, domestic fiscal policy and an escalation of market problems in Europe. Even the recent run of more favourable labour market data was questioned, with the minutes noting that "other indicators of labour market conditions ... did not show decided improvement."

The FOMC concluded by saying "Looking ahead, a number of participants indicated that additional asset purchases would likely be appropriate next year." This is not an optimistic outlook from the Fed.

This wall of worry is showing up all too clearly in the biggest financial market globally – that of government bonds. Ten-year government bond yields were edging higher a couple of months ago as the hints of optimism crept into market thinking. Those trends have now been reversed. When one considers current 10-year yields of 1.59 per cent in the US, 0.74 per cent in Japan, 1.34 per cent in Germany and even 1.75 per cent in the UK, it is not a scenario where inflation risks and a strong upswing in activity is evident. It is hard to fathom that just five years ago, the US 10-year yield was around 5 per cent.

The bond market is shouting out that the global economy is still in the doldrums, that disinflation pressures are intensifying and that 2013 is likely to be another year of uncomfortable economic challenges.

These recent market trends and signs of concern from the Fed about the US economy crush the optimism of August and September when the US Fed, the European Central Bank, the Bank of England and the Bank of Japan, among others, expanded their unconventional monetary policy and gave pledges to "do whatever it takes” to spark a sustained upswing.

It appears that the pledge is getting more and more costly as more and more needs to be done to try to get he global economy on an even keel.

More from Business Spectator


Please login or register to post comments

Comments Policy »
"Do whatever it takes" = hyperinflation just around the corner.
The story is old, and VERY familiar. (A global pick-up on the rocks?, November 15)
Adam Carr says the 'hard' data is great, markets are 'irrational',RBA and FOMC are wusses and should be tightening instead. According to him all the other experts and govt. agencies are wrong,wrong,wrong. (A global pick-up on the rocks?, November 15)
"Central banks might be running out of firepower" (A global pick-up on the rocks?, November 15). I think you will find that they have unlimited firepower. It is just the purchasing power that will suffer. I would have thought that after living through several periods of high inflation you older guys would understand these things.
It has been obvious for some time (A global pick-up on the rocks?, November 15).
The main reason why Wall St increased was the continuation of US Government deficit spending. The proble, is that every time they have a deficit of $1 trillion they add $50 billion to their debt servicing forever. In 2011 their debt servicing was $454.4 billion.
Their mandatory spending plus their debt servicing had a shortfall of $251 billion in 2012 over their total revenue.
I think analysis would show that this exists in Japan, Italy, Spain,, France, Great Britain and probably most of the provinces in China. Considering the amount of money flooding out of China, I suspect that they might have a few problems at the national level also.
“To do whatever it takes” might just mean taking the medicine getting the national budgets into balance because blind Freddy can see that all this deficit spending by governments is not working.
And getting the budgets into balance will mean reducing expenditure and increasing taxes. Once that happens, consumer confidence just might return.
Never buy until there is blood in the streets. That means mortgagee in possession signs everywhere. No signs, no troubles. (A global pick-up on the rocks?, November 15)
Stephen Koukoulas mistakes cause for effect (A global pick-up on the rocks?, November 15).
The cause is government austerity at a time of private deleveraging/increased saving. (the various net external balances all cancel out on a global sense).
Remember GDP = G + P + E is an identity, not an ideology.
Richard Koo has been making this clear for years.
Only when the private sector is able and amenable to increasing borrowings can we expect government austerity not to cause reductions in real GDP.
We are just seeing the deleveraging of stock markets due to massive stimulus pumped into the markets. Remember, the US market made a new high when unemplyment had been > 8% for 40 months, growth is 2% and the US governemnt has massive debt. Does that sound like a stock market that should be peaking. So oftern it is the reporting season when the markets drop because the expected results didn't materialise. Money makes the world go round and money makes stock markets rise. (A global pick-up on the rocks?, November 15)
Even the thought, of increased government spending, will put upward pressure on interest rates (A global pick-up on the rocks?, November 15)
Higher interest rates, means higher sovereign pressure (upward) on the AUD.
A higher AUD means a reduction of our terms of trade. Downward, movement in export value, ships jobs overseas.
Or, would our learned friends from the RBA, like to challenge that?
When the world is deleveraging, we need an RBA, that is prepared to do "Whatever it takes".
The Dow is mostly run by software to manage micro transactions rather than Business fundamentals. (A global pick-up on the rocks?, November 15)
When the ones and zeros see the fiscal cliff then we could be in trouble.