Global weekly: When paths diverge

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The lack of a clear direction and a stream of depressing news has hurt sentiment. Markets perked up after Fed Chair Janet Yellen said that a rate hike was “likely” in 2015.

Markets are uncertain. This is owing to conflicting signals from many corners and increasing divergence. Developed economies are doing well, while emerging economies suffer. The US central bank will be “tightening” its monetary policy when it begins hiking rates, while the ECB is expected to “loosen,” by increasing its monthly asset purchases. China is experiencing a slowdown, but it is expected to be adequately managed by policymakers. Even within China, industrial activity has slowed, while the services sector remains robust. And, up until Thursday night, there was increased uncertainty about the timing of rate hikes in the US. The lack of a clear direction and a stream of depressing news prompted confusion and gloom.

Despite rising market risks and increased volatility, ABN AMRO Group Economics continues to believe that the effects of the deterioration in emerging markets will not impact the recovery in Europe or the US. These economies are expected to continue to strengthen. The fact that growth in advanced economies has significantly broadened suggests that they are not particularly vulnerable to emerging markets in the short term.

This week, US durable goods orders and Germany’s Ifo business climate indicator were both better than expected, with the details for the latter showing that the German economy is healthy and relatively resilient against the slowdown in China. Data from emerging markets, however, point to increasing difficulties. In particular, this is related to the cooling of industrial activity in China, which negatively affects many other emerging markets. Weak commodity prices are another headwind, although they are now stabilising.

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