An old saying in the local market is that ‘when the US sneezes, Australia catches a cold’.

There is no doubt that over the past six years, the US economy has been in intensive care getting large adrenalin shots in the form of ultra-accommodative monetary policy to treat its’ debt disease. However, with the de-leveraging process now mostly complete in the US, the patient was discharged this year as it was back to better health. However, there is more than one patient in that hospital with Japan, Europe and China all experiencing rising debt since 2009 which has seen them move into the same room that the US was once in and this is impacting global markets.

Emerging market stocks are trading at a six-year low, pushed down by Asian and Latin American markets as rising Chinese risks sparked a hemorrhaging in commodity prices. Almost all stock indices in these two regions have declined over the past year, but more recently, fears of decreased Chinese government support for the equity market has sparked increased selling pressure. But in many ways this reflects the stresses that were evident in late June which were never properly treated by the authorities.

While Chinese shares rose in mid-July, actions (such as suspending more than half the market and banning major shareholders from selling stocks for half a year) created more questions than answers, and the subsequent gains have fizzled out in recent weeks. However, the action hasn’t been limited to shares, with commodities and foreign exchange markets also declining and one feels we are not at the end of this transition.

Therefore let the word go out henceforth that ‘when China sneezes, emerging markets and commodity producers catch the flu’. having said that, let’s hope that respective central banks in these countries and regions have enough vaccine, in the form of monetary stimulus, to stabilise the body. Most importantly, let’s hope that emerging market stresses don’t turn into an epidemic, as there may not be enough strength in the global economic body to absorb the impact of this combined force.

Article written by Matt Sherwood, Head of Investment Markets Research, Perpetual.

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