As the focus stays on central banks and their policy decisions, it is easy to forget that while things are holding up well in the US, the risks of a hard landing seem rather far away. But if there is one thing that markets should not underestimate, it is the influence and impact of China on the global economy.
It has been a while now that we have seen worsening demand conditions in China and one can argue that domestic demand is even feeling rather dead in the water over there now. That is exemplified by financial struggles in the property sector and deteriorating consumption activity. What is worse is that we are even seeing deflation pressures come up now in China, as evident by the latest CPI report here.
The prescription certainly isn’t a good one and while markets did get a little jittery yesterday, it doesn’t seem like they are all too concerned in the bigger picture. But should traders and investors really be?
I singled out China as being the main risk in this post here last month:
And I still stand by that view for the time being. Markets were able to quickly brush aside the banking crisis in March to April, so it is evident that it will take something more to really break the foundations of the optimism this year.
In other words, a soft landing isn’t going to bother markets as things stand. It will take something breaking to really jolt investors and if that something is China, that’s one risk that should not be understated. When China sneezes, the world catches a cold. That tends to be the saying so it is best not to discount the risks associated.