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The world economy looks increasingly like a gerontocracy. Old Europe cannot resolve its structural problems and weakening data out of the middle-aged US culminated in a miserable jobs report on Friday. How could the spry Asian region, with its export-driven economies, fail to be dragged down by these doddering wrecks?

Stock market performance is certainly suggestive of some form of global economic unity. In the last month, US stocks were
down 6 per cent, European shares fell almost 7 per cent and Asia markets fell nearly 8 per cent. But this is not simply a case of the infirm developed world dragging down the vigorous emerging world. Only about 8 per cent of emerging Asia’s exports head to Europe, while a quarter go to China. And Friday’s weak manufacturing data were just the latest trigger for growing worries about the extent of China’s slowdown. There can be no doubting Beijing’s determination to keep growth steady near its 8 per cent target. But disappointment that the government has not yet resorted to the 2009-style all-hands-to-the-pump approach will weigh on sentiment in the near term. It may be time for investors to brace themselves for the cuts to earnings forecasts that are sure to come.

The other piece of the puzzle is Asian markets’ relationship to the US dollar. Current account surpluses across the region have been falling since 2007 and are shrinking further as exports slow. This makes it easier for the dollar to gain while limiting the need for intervention by Asian central banks to curb the strength of their local currencies. This means that there is less excess liquidity sloshing into the region’s markets. Emerging Asian stocks have done badly when the dollar is strong, in spite of their perceived export focus. This is the case now. On a trade-weighted basis the dollar’s rally began last May, not long before the region’s markets began to underperform.

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