We are going through a text book correction in global imbalances. Nobody should expect all imbalances to be addressed. Saving-investment gaps in each country can hardly be equal to reach a perfect equilibrium. In the mantime though one should bare in mind that improvement of the US deficit means some other countries' external position is deteriorating. This part of trade is a zero sum game. As Krugman commented China's trade surplus needs to fall to contribute to the process. This is partly a currency issue but partly domestic demand. No one can blame China for not supporting domestic demand. However, export industries are also getting a boost to ensure mass unemployment does not lead to socail unrest.
Equally in the US this data may put a dent on the green shoot theory. However, given markets' current mood weak numbers will be shrugged off relatively quickly. In fact these numbers will probably be taken as "historical" and markets are now "looking forward". As such Jean-Claude Tricthe yesterday declared that global economy was at an "inflection point". So officials -- even the very conservative ones -- now believe worst is behind.
As per my earlier notes nothing falls at a straight line and rate of change of decline bound to have improved at some stage. So no surprises there. Equally though the world economy is clearly lacking in drivers to generate a sustainable growth rate in the next few years. At some stage this will dawn on the markets and will spell the end of the current rally. It will probably coincide with most economist/analyst turning positive. However, for now we shall enjoy the journey. Sure it would have been great to see some consolidation before heading higher to bring in new buyers but we simply can not have everything.
I will be on the look out for signs of fatigue in market activity. At this juncture we are struggling to find new stock ideas to add to the portfolios. This suggests markets are getting a bit heavier. Perhaps it makes sense to put some stop losses at this stage. Risk-return trade o is getting more balanced at these levels.
Finally we've started hearing a lot about emerging markets de-coupling. You can see the result of this thesis in the chart from Bloomberg which shows MSCI emerging market v developed market equities. As it is clear from the chart we are back to 2007 highs, which were sustained for a while under the same argument. Clearly EM is in much better shape then DM but this was the argument that brought us to the highs back in October 2007.
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