G20 Warns of Uneven Economies as U.S. Growth Decelerates

The Group of 20 sees greater risks in historically low interest rates in developed nations as more investors are investing in emerging markets to improve returns.

The Group of 20 sees greater risks in historically low interest rates in developed nations as more investors are investing in emerging markets to improve returns.

In an official statement, the G-20 said that aggressive investment in emerging markets has caused many to take on too much risk in too short of a period of time, and that a rise in U.S. Treasury and Eurozone bond yields could cause extreme volatility in emerging markets. “We are mindful of the potential for a build-up of excessive risk in financial markets, particularly in an environment of low interest rates and low asset price volatility,” said the G-20 officials in their statement, adding that uneven growth in different global markets could cause excessive turbulence in underperforming markets, leading to a greater chance of recessions and depressions in parts of the world.

While the G-20 said uneven growth threatens global financial stability, the American central bank announced that economic growth is decelerating amidst declining manufacturing activity and flat employment data. Additionally, an early indicator of a decline in housing demand may suggest that American growth is threatened at a time when the Federal Reserve is looking to tighten monetary policy.

Excessive Risks in Financial Markets

Pointing to declining volatility and the growth of shadow banking in developing economies, particularly China, International Monetary Fund chief Christine Lagarde said in a recent speech that central banks need to use tools to respond to risk-taking that could threaten financial stability.

In recent weeks, the IMF has warned that yield chasing amongst investors is creating a glut of capital in some emerging markets. As bond yields have declined in the developed economies, especially in the United States and the Eurozone, more investors have spent more on emerging market debt despite recent panics such as the Argentinian default and a possible liquidity contraction by the People’s Bank of China.

To respond to the excessive risk taking from investors, the G-20 has announced it plans to monitor capital flows with a particular focus on how funds may reverse course in 2015. The G-20 sees the risk of a tightening monetary policy in the U.S. after it ends its quantitative easing program in October, which could cause higher bond yields and less capital availability in developing economies.

Chicago Fed Turns Bearish

While European analysts are seeing greater risk taking in financial markets, the Chicago Federal Reserve announced that economic activity saw decelerating growth in August, despite expectations of an improvement from the prior month. According to the Chicago Fed National Activity Index, activity fell to -0.21 from +0.26 in July. Production activity seemed to decline to -0.17, compared to +0.24 in July. Manufacturing fell 0.4% in August compared to 0.7% growth in July, and manufacturing capacity utilization—a key indicator of wholesale growth expectations—fell to 77.2%, down 0.4% from the prior month.

While manufacturing and production seemed soft, employment indicators made a neutral contribution to the Fed’s indicator. While unemployment fell from 6.2% in July to 6.1% in August, nonfarm payrolls rose by 142,000, down from a 212,000 increase in the prior month.

Sales, orders, and inventories rose to +0.08 in August, and consumer consumption and housing rose from -0.13 to -0.12. The mediocre improvement was insufficient to offset a decline in housing starts to 956,000 annualized from 1.1 million in July. Housing permits also fell from over 1 million to just under that number on a month-to-month basis.

U.S. Equities Respond

U.S. stocks declined in early morning trading only to fall further in the afternoon, with the S&P 500 losing over 1% from peak to trough in intraday trading. The Dow Jones Index fell 0.59% but the NASDAQ stumbled over 1.5% in intraday trading as many investors looked for offload exposure to high risk assets such as technology stocks. Several momentum stocks lost mid-single digit percentages in trading.

The much anticipated IPO of Alibaba Group Holding Limited, a Chinese e-commerce focused conglomerate, disappointed traders with losses exceeding 4% on Monday from Friday’s intraday average. Some analysts have called into question the company’s complex ownership structure, while others have pointed to a low price-to-earnings ratio as a substantial tailwind.

The S&P 500 remains up nearly 8% from January, and the Nasdaq 100 is up over 12% year-to-date.