John  Browne

The current stock market is earning a deserved reputation as being coated in Teflon. Bad or disappointing news just doesn't appear to stick, and has done nothing to slow the market's upward trajectory. Bad news is good and good news is good news. But where does this all end? A minority of investors have begun to wonder whether negative geo-political risks, embodied in the steely-eyed stare of Vladimir Putin, are exerting more influence on the market than the sunny smiles of Janet Yellen. Just going by the market numbers, Yellen remains firmly in the driver's seat. Thus far this year, the S&P 500 is up more than 8% and there has been little evidence that investors fear a pull back.

But despite the surface enthusiasm, the hard-core data provides little to celebrate. At the end of last year, economic confidence for a strong 2014 was nearly universal. But so far this year the International Monetary Fund (IMF) has cut its forecast for US GDP growth from 2% to 1.7% It also cut its global forecast from 3.6% to 3.4%. Japan, which has been a key piston in the global economy, has seen its GDP collapse in the second quarter to an annualized -6.8%. Its outlook for the year doesn't look good either. Italy has gone back into recession, and the list goes on.

Last week, it was reported that the EU's three largest economies had fallen into negative growth. Germany, which was recently surpassed by China as the world's largest exporter, saw its quarterly GDP slip to a negative 0.2%. The quarterly GDP of France again saw no growth and that of Italy to negative 0.2%. Despite the quarterly increase of 3.2% in the GDP of Great Britain, the EU's fourth economy, EU growth has stalled.

The seriousness of a recession in the EU and its effect on an already unhealthy-looking world economy should not be underestimated. The U.S. and EU transacted some $650 billion of mutual trade in 2013 based on U.S. Census Bureau figures. According to the European Commission, "The EU and the U.S. economies account together for about half the entire world GDP and for nearly a third of world trade flows." The geo-political side of the equation is perhaps even worse.


John Browne

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.