Tricky months ahead as US diverges from world markets

GLOBAL equity markets have been giving divergent signals this year, possibly due to the trade wars and the resultant prospect of declining global growth. The narrative of a synchronised global recovery has clearly turned anaemic. While the US equity markets are touching new highs, Europe, China and most of emerging markets (EM) have delivered negative returns this year.

This US divergence, in part, is an obvious consequence of the improved earnings and robust economic data in the US. Additionally, the unbridled rise of the US dollar has caused global investors to seek dollar assets at the expense of all else. This has caused a liquidity crisis for US dollars in the global markets.

The rampant selling of EM assets has sent many EM currencies into a tailspin. Venezuela, Argentina and Turkey lead the pack of those caught in the vicious downward spiral as repayments of their external debt draw closer. Argentina raised rates to 60 per cent two weeks ago (end-August) and sought an urgent bailout from the International Monetary Fund (IMF), despite being relatively disciplined in its fiscal affairs.