For a lot of 2013, the big economic story has been the coming rise of the American economy vis-a-vis pretty much every other major economy around the world.
Europe has been the basket case of the global economy for years, China appears to be slowing (at least as of the second quarter), and emerging markets find themselves on the hot seat as investors begin frontrunning a tapering of Federal Reserve bond purchases, which could come possibly as soon as September.
The thesis is that the U.S. dollar is on the verge of a secular bull market, is re-correlating with U.S. stocks (implying that U.S. stocks are on the cusp of a bull market as well), and will help contribute to U.S. economic and stock market outperformance relative to the rest of the world in the years ahead.
However, in the last few weeks, signs have emerged that America may not actually have such a monopoly on the global growth story as one might think based on the narrative outlined above.
DBS analysts reflect on this idea in a note Friday, given Thursday’s sell-off in the United States:
You know the USD is in trouble when it depreciates after US long bond yields headed to a two-year high. US stocks did not do that well either, posting its worst drop since late June. US jobs market may have improved, but same-store sales at Walmart declined and Cisco cut jobs. So, what happened to the theory of higher US bond yields leading to higher US equities and a higher USD?
One thing has changed recently. The US economy is not monopolizing the global growth story anymore. Japan joined in earlier this year with Abenomics, fol
lowed by stronger numbers from the UK, and now the emergence of Eurozone from recession. By the way, Germany is projected to displace America as the world’s second largest exporter this year. European stocks had been moving up last week in spite of US stocks moving nowhere.
Question now is whether China is the next major economy to join the broadening growth recovery story. China’s demand for copper reportedly rose to their strongest level on record. The Shanghai Composite Index has been edging up lately. The yuan is also near their all-time high. Some concerns have arisen that China and Japan may have started to lighten their holdings of Treasuries as bond yields edged higher. Diversification often suggests a shift towards alternative reserve currencies such as the euro and the Australian dollar.
In summary, currency markets may be waking up to the reality that, in a broadening global recovery, that it cannot be bullish only on America, and too bearish on Eurozone and China, and possibly emerging markets too.
Equity markets may be waking up to that reality as well. This week, European equity funds recorded their biggest inflows in more than two years.
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