Global stock markets took a hit this week as renewed turmoil in emerging markets (EM) once again came to the surface. As we have highlighted recently, EM assets tend to get vulnerable every time China slows down and Fed hikes move to the agenda. On top of this, we see bouts of regional uncertainty: in Hong Kong, demonstrations have put the issue of social stability in China on the agenda and in Brazil, surveys have shown increased support for President Dilma Rousseff in the upcoming election. President Rousseff is less reform friendly than her opponent Marina Silva. Add to this the war against ISIS, the still brewing Ukraine crisis and the first case of Ebola in the US and a patchwork of many hotspots appear.
The MSCI EM stock index has fallen in a straight line over the past month giving up close to 10% of its value. Similarly, EM currencies have taken a hit with a monthly decline of 10% in the Brazilian, 9% in the Russian rouble, 6% in the South African Rand and 4% in the Indonesian Rupiah. The rising uncertainty is increasingly spreading to western markets too. Especially European stocks took a dive on Thursday as market expectations of stronger QE signals from the ECB proved too optimistic.
Weaker US data adding to the shaky environment
Over the past week, softer US data contributed further to the concern in the markets. The US economy has been the only pillar of strength at a time when all other regions look weak: the recovery in Europe continues to lose momentum, Chinese activity has slowed over the summer and Japan is still struggling to recover from the VAT hike in April. As the biggest economy in the world, the US importance cannot be underestimated. The strength seen here explains why markets have in general been able to cope with weakness in other regions over the past months. However, after a period of positive data surprises, we believe the US may see some more disappointments in the short term. This is mostly because a) expectations have moved higher and thus become more difficult to beat and b) the economy tends to move in mini-cycles and following a very strong development Q2 and Q3, we expect to see moderation in Q4. The US economic surprise index reached quite a high level in September but is starting to come down. Normally, when the surprise index peaks it continues down for some time due to the above-mentioned factors.
The softer picture was also visible in the decline of ISM manufacturing for September from 59.0 to 56.6. Consumer confidence also softened slightly in September. It does not mean that we expect a weak picture in the US. Growth is expected to be around 3-3.5% over the next couple of quarters. But many surveys reflect the 4-5% growth pace seen in Q2 and thus are bound to come down, in our view.
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