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Will the Uncertainty Last?

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Friday, March 14, 2014

Nervousness about the unfolding Ukraine situation and China-centric growth worries weighed overnight in the Asian and European markets. This issue will likely be the dominant theme in today’s U.S. trading session as well, perhaps not as pronounced as was the case on Thursday, but nevertheless a negative factor.

I don’t think the Ukraine situation will get out of hand and materially shift the current global macro picture. But markets are understandably nervousness at the type of headlines coming out of the region, ahead of the controversial Sunday referendum that will likely seal the Crimean region’s future.

Russian mobilization of its troops on the Ukrainian border and reports of Ukraine seeking U.S. military help have stoked fears that the thus far contained issue could very well morph into a military conflict. At a minimum, growing rhetoric about sanctions on Russia and Russian businesses are unnerving for investors as sanctions would likely have negative effects on the fragile global economic recovery, particularly in Europe.

Data out of China in recent days spotlights the fragility of the global economy. Questions about China’s growth outlook have been with us for more than a year, but the issue had died down a bit in the second half of 2013 following stabilization in economic variables. Weaker than expected readings this week about industrial production, retail sales and exports has brought the issue back to the forefront.

There is some hope that the data weakness could be due to distortions by the Lunar Year, which will clear up in the coming months. But fears of vulnerabilities in the country’s banking and broader financial system and overall lack of confidence in the integrity of official Chinese data add to these growth fears.

Markets have given a pass to the recent run of soft U.S. economic data, putting all the blame on this year’s harsh winter. Many investors are willing to do the same with China, for different reasons. But the market’s patience isn’t limitless and will likely shift if data fails to turn around in the coming months.

Sheraz Mian
Director of Research

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