Before Friday’s relief rally, the recent severe market turbulence had three distinct phases. It started with concerns about Chinese exchange rate policy. Then came a renewed collapse in oil prices. Finally, last week, came increased fears of a persistent slow-down in the US economy, following weak activity data from the US industrial sector.
The last of these factors is perhaps the most serious for the markets, since it represents the first genuine reason to worry that an important part of the global economy might actually be weakening. Until now, the bear phase in equity markets has not been backed by much evidence of a slow-down in global activity, though our “nowcasts” have been warning for some time that US growth has been out of line with the global aggregate, and is heading in the wrong direction.
The markets have tended to agree with the Federal Reserve in viewing this as a temporary dip, driven largely by specific drags on the US manufacturing sector. But now investors are starting to worry that the slow-down could become much more persistent than previously believed. The drags from oil output, foreign demand and the rising dollar are proving to be more negative for the economy than forecasters, including the Fed, have recognised. Read more