Looking at the recent slowdown in the US economy it would be easy to conclude that policy decisions made in Beijing aimed at cooling the Chinese economy are impacting America a few months later.
“Given that the developing world and China especially were instrumental, along with the US, in leading the global recovery, the tightening of monetary policies throughout the emerging economies can be singled out” as a reason for the current slowdown said Mike Lenhoff, the chief strategist at Brewin Dolphin in London in a research note.
Other reasons for the slowdown witnessed across so much US economic data include high oil and food prices, the supply disruptions caused by the Japanese earthquake and nuclear disaster, and a limited availability of credit in the developed world, according to Lenhoff.
But he believes the US slowdown can mainly be attributed to factors within the US economy.
“The uniform loss of momentum apparent across May’s Purchasing Managers’ Surveys may be accounted for by May’s loss of momentum in the US non-farm payrolls” said Lenhoff.
“When combined with this year’s US slowdown, the much weaker than expected job figure helps make the point that while China is the new and powerful global player, America’s influence over the global economy is still overwhelming,” he said.
Not Too Hot, Not Too Cold
For equity investors the question is whether we are facing a slowdown or something more sinister.
Lenhoff believes the market is being limited on the upside and supported on the downside by the uncertainty.
“Equity markets have had trouble sustaining any progress this year,” he said.
“The commitment by the Federal Reserve to maintain its easy monetary policy combined with the determined efforts on the part of the ECB (European Central Bank), EU (European Union) and the IMF (International Monetary Fund) to avoid a Greek defaulthelp account for why equity markets have been reluctant to give up much ground," he said.
With volatility for stocks low compared with 2010, Lenhoff believes we could see more selling before investors jump back on the equity band wagon.
“May’s extended selloff into this month has left the FTSE All-World Index less than 5 percent down from its recent top – hardly worthy of a buying opportunity.
Tactically, equity markets may see a bit more selling as they have yet to reach anything resembling an oversold condition,” Lenhoff said.
“More downside then is likely to bring in the buyers, especially those who share our view that the widespread loss of momentum is likely to be par for the course in a global economy that is moving from recovery to sustainable expansion,” said Lenhoff.