Fears of a new US slowdown are spooking investors: Maley

Last night, the bulls seemed to lose some of their mojo. After some serious pushing over the last week or so, they’d managed to push the major global share indices to the point where they’d regained about half the losses they sustained from their April peaks. But all of a sudden, the bulls seemed to succumb to doubts about the robustness of the economic recovery.

It’s hardly surprising that the bulls are giving pause. The market is now at a treacherous stage with most of the leading indicators suggesting that the US economy is about to slow. The ECRI weekly leading indicator is now in a zone that has been historically associated with a recession. The US OECD leading indicator is also heading downwards, although not as sharply. And the bulls know that when the economy heads downwards, the market is not far behind.

The problem is that there’s a huge amount of uncertainty as to whether these leading indicators will be vindicated, and, if they are, whether the US authorities will be ready to introduce fresh stimulus measures to revive a flagging recovery.

Last week, US Federal Reserve boss Ben Bernanke told the US Congress that he thought the country’s economic outlook was “unusually uncertain”. He said the US central banks still expected that the US economy would show moderate growth this year, despite the “somewhat weaker outlook”. He also appeared reluctant to commit the US Fed to further stimulus measures.

But others have warned that the US economy is at risk of a serious relapse, with consumer spending dwindling, while US unemployment rates remain high, and the housing market remains under pressure. And they’ve called on the US government to immediately boost spending to avert this outcome.

This backdrop of increased economic uncertainty even weighed on the bulls overnight.

Their spirits were clearly dampened by data that showed disappointingly low durable goods orders, which seemed to bolster the evidence that US economic growth is slowing.

New orders for long-lasting US manufactured goods dropped 1 per cent in June, following on a revised 0.8 per cent decline in May. This represents the largest drop since last August, and was something of a set-back for those who had expected that orders would rise by 1 per cent in the month.

Similarly, the US Fed’s Beige Book, which reports on general business conditions, found evidence of slight improvements in most of the 12 regional districts surveyed. However, the survey did find that retail sales remained subdued, while conditions in housing and construction sectors remained weak, and businesses still found it difficult to access credit.

The uncertainty over the future is causing investors, who had until last night been celebrating buoyant second quarter profit results, to cast a nervous eye toward the future.

Although both the aerospace giant, Boeing, and the world’s largest steel-maker ArcelorMittal reported second quarter earnings that beat analysts’ forecasts, investors were unnerved that both companies were cautious about their immediate future.

This article first appeared on Business Spectator.