Economic reality finally cracks market fervor

LONDON: As evidence mounts that a mid-year slowdown is taking place
in the world economy, the next few days will offer a clearer glimpse of
how that will impinge on policymaking and buoyant financial markets.
Global
stocks stumbled last Thursday in one of the few times the grey economic
reality cut through this year's reverie in financial markets.
And that could mark the start of a trend, after Federal Reserve Chairman Ben Bernanke
last week hinted the U.S. central bank could soon scale back its
monthly bond purchases that have flooded stock markets with new cash.
Some poor business surveys from China have also had an impact, suggesting the world's No.2 economy is struggling for momentum.
While
there is little in the way of major economic data this week that will
send chills through stock markets as happened on Thursday, there is a
renewed sense of caution in the market.
"The underlying momentum
in the global economy is weaker than it should be at this point of the
economic cycle, five years after the global crisis," said Lena Komileva, director of G+ Economics consultancy in London.
"We
have yet to see evidence of a convincing, self-sustained positive
feedback loop between real growth and market value inflation."
Hope that market confidence would filter through to the real economy was memorably described as "positive contagion" by European Central Bank President Mario Draghi in January - in hindsight perhaps more in hope than expectation.
Growth
is still proving to be elusive for the euro zone economy, largely
thanks to the extent of the budget austerity taking place across the
continent.
On Wednesday, the European Commission will release its
review of its countries' debt-cutting policies, which will confirm that
the likes of France, Spain and Slovenia are to be given more time to
trim their budget deficits to target.
The Organisation for
Economic Co-operation and Development's semi-annual review of the
world's major economies will come out on the same day, having identified
global economic activity "picking up" in its interim assessment in
March.
Now, the world economic growth seems to be moving into a
soft patch, although there is no sign of anything that will curb it
significantly.
Last week's purchasing managers indexes showed
factory activity in China declined slightly for the first time in seven
months, while in the United States manufacturing grew at its slowest
pace since October.
"These surveys suggest that the Chinese
economy is doing a bit worse than expected and the euro zone marginally
better, but they do not alter our view that global growth will remain
weak, and imbalanced, for the rest of this year," said Andrew
Kenningham, senior global economist at Capital Economics.
He
noted, however, that economies like the UK and Japan that weren't
covered in last week's PMIs have performed better than expected in
recent months, so the global economy could be slightly stronger than the
surveys implied.
TAKING STOCK
Since last Thursday's stock
markets wobble, analysts are largely agreed that period of moderation,
rather than a big correction, lies ahead for risk assets.
European
markets have been particularly sensitive to shifts in sentiment over
the last few years, and three Italian government bond auctions next week
will provide more clues on investor intentions.
Spanish yields
rose at auction for the first time in three months in the past week, and
the Italian auctions will provide further interest because they will be
the first since Fed Chairman Bernanke hinted that waves of new cash
from central banks will not go on forever.
Governments in the
euro zone's most vulnerable economies, like Spain and Italy, have
benefitted hugely from reduced borrowing costs resulting from easy cash
flowing out from the Fed and Bank of Japan, and into their bonds.
That
of course applies to stock markets too, and Bernanke's intervention
will set a new tone on global bourses in the coming weeks, marked by
increased uncertainty.
The Euro STOXX 50 Volatility Index,
Europe's widely used measure of investor risk aversion, surged 13
percent to a three-week high last Thursday alone.
"We remain
positive on equities in general ... (but) more broadly, equity markets
may lose some momentum now that they must worry about stimulus
withdrawal," said Guy Foster, head of portfolio strategy at Brewin Dolphin. - Reuters