In his weekly ‘Sunday Start’ note, Morgan Stanley’s Joachim Fels has a fantastic summary of the state of the world right now.It’s basically an elaboration on this idea that China is turning the corner, Europe has taken the tail-risk blowup scenario off the table, and now it’s the US’ turn to not fall into the abyss.
The top-down official view in Beijing that the economy has stabilised received some bottom-up support from the 270 companies and 1,800 investors we assembled in Singapore at Morgan Stanley’s 11th Annual Asia Pacific Summit later in the week. The cautious optimism from companies operating in and investors focusing on China contrasted sharply with the negativity I encountered at a similar event we hosted in Hong Kong only six months ago. With China stabilised and thus less of a worry now, and Europe (rightly or wrongly) no longer seen as a systemic risk thanks to the ECB backstop, many investors have now turned to the US fiscal cliff as the next big thing that could get in the way. And rightly so, in our view. As our US chief economist Vincent Reinhart points out, the most likely timeline on the fiscal cliff after the election remains a patch with a promise followed by a plan (see here). However, the economy may have to go over the cliff first before the patch is put in place. And this is exactly the risk equity markets have started to focus on in the last few days. After tomorrow’s Veterans Day, congressional leaders and President Obama will try to hammer out a compromise (see also Quote of the Week below). Based on past experience, I won’t hold my breath, though.
This is an increasinly popular lense through which to view the world.
We expressed the same idea back on November 1, and the points only seem to be reinforced, especially in China, where there’s a nice reinforcing message happening between the economic data, and as Fels notes, the noises from the corporate world.
Until it’s resolved, the Cliff seems to be the world’s big stor.
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