The focus of investors has shifted beyond concerns about a U.S. recession, as they now consider the possibility of China and Europe dragging down the world's largest economy. Recent disappointing second-quarter growth data from China and the reopening trade fizzling out in China are overshadowing Treasury Secretary Janet Yellen's reassurance that she sees no U.S. recession. European equities have been mostly lower, while the major U.S. stock indexes have attempted to push higher after a mixed open.
China's economic struggle has extended its impact to commodities, causing gold to pull back from its best week since April and leading to a retreat in oil prices. The world is now closely monitoring developments in China, highlighting the latest shift in narrative among investors and traders. While the focus had previously been on whether the U.S. economy would have a hard, soft, or no landing, there has been less discussion about whether a robust U.S. economy can withstand a global economic downturn.
The eurozone experienced a technical recession earlier this year due to a cost-of-living crisis, while China's self-imposed Covid lockdown reopening trade is losing momentum, and deflation pressures are mounting. China's second-quarter growth data revealed a growth rate of only 0.8%, compared to 2.2% in the first quarter and 6.3% year-on-year.
As investors assess the global macro environment, the performance of the U.S. dollar fluctuates based on how investors perceive the U.S. relative to the rest of the world. Keith Buchanan, senior portfolio manager at GLOBALT Investments in Atlanta, which oversees about $2.5 billion, emphasizes that there has been a recent divide between the U.S. and other major players like China and Europe in terms of growth, inflation pressures, and pandemic recovery efforts.
Read: The world's already in recession, this strategist argues — and most markets agree
The Implications of China's Economic Slowdown on Global Markets
As Europe battles with persistent inflation, the focus now shifts to China and whether it requires additional stimulus measures. Unlike Europe and the United States, China is facing a unique set of challenges. The question arises whether all three major economies can continue on their respective paths without impacting each other.
The market has already priced in the United States nearing the end of its tightening cycle, along with optimism surrounding a soft landing. However, considering the global economic landscape, it remains uncertain whether this soft landing can indeed be achieved. Only time will reveal the outcome. More importantly, the question arises whether there is sufficient willingness to reignite and reengage China's economy through stimulus measures before we can even ponder about avoiding a potential recession in our own economy.
Despite Federal Reserve Chair Yellen's reassurances during her recent interview with Bloomberg Television that she does not anticipate an economic downturn in the United States, the impact of China's slowdown cannot be overlooked. It has the potential to create ripple effects around the world, undermining global economic stability.
Raffi Boyadjian, lead investment analyst for XM, pointed out that China's economy is in a far weaker position than previously anticipated, given its year-over-year performance. He further emphasized the growing frustration and anxiety surrounding China's economic prospects due to the absence of substantial stimulus measures.
The shifting tone within global markets indicates a potential turnaround from last week's optimistic sentiments regarding easing inflation. Investors were buoyed by June data on U.S. consumer prices and producer prices, which suggested that inflation may naturally ease without adversely affecting the labor market. As a result, stocks experienced weekly gains.
The current situation in China demands careful monitoring and an assessment of the impact it may have on global markets. With the need for potential stimulus measures and the growing concerns about China's economic prospects, it is clear that the stability of the world economy hinges on the resolution of these issues.
