Economic recovery and rallying equity prices do not always go hand in hand with restoration of sound finances. Today’s S&P’s downgrade of the Baltic region reminds us of just that.
Recent headlines may have begun to raise questions about the actual sources of growth and their longevity. Laura Tyson, economic adviser to President Obama just said the day before yesterday: “The expansion that you'll see in the second half of the year in the U.S. economy is primarily driven by two things: the stimulus and inventory adjustment … once the government steps back, we're not sure that the private sector is going to be enough to pick up the slack.”
Practically at the same time, China’s National Bureau of Statistics Chief Economist Yao Jingyuan said: “We should not take our foot off the accelerator. If we do, the economy will slide back.”
And yesterday, Sushil Wadhwani, a former member of the Bank of England Monetary Policy Committee said: “People think things will then return to normal, but these bounces are driven by temporary factors.”
Alongside these warning statements we see slowing, if not contracting, inflation in different important countries like Germany, Japan, and China, that suggests inflation fears are departing for now from center stage.
The August 2 uptick in gold prices have now come down for the past seven days. The latest CFTC futures data now show that short positions are bigger than long positions, which is a rare event. This could indicate further lower prices in gold.
At the same time it’s noteworthy that EUR/USD and GBP/USD are currently trading just above their short-term uptrend-lines which come in at around USD 1.41 and USD 1.64 respectively.
Recent global and U.S. signs are pointing increasingly to growing risks to sustainable recovery that lie ahead. Hence, if greater doubts over the global economy were to begin permeating into equity prices, then a potentially make-or-break period lies ahead.
Investors shouldn’t take these warning signs lightly.
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