Macroscope | Global investors think it’s all over, but they’re in deep denial about impending risks

US jobs are surging, Fed rate tightening bets are back on the table, emerging markets are breaking higher, commodity prices are rebounding and global investors have a newfound sense of confidence. Crisis! What crisis? They think it’s all over, but they would be wrong to believe it.

Short squeeze, bear market rebound, call it what you like, but markets are back on nothing more solid than a mini roll right now. It might extend a little further beyond this week’s European Central Bank meeting, which should see more monetary stimulus conjured up, but it is inevitable that global investors remain in deep denial about the impending risks.

The slide in world trade growth in the past few years underlines that global economic confidence is extremely weak. Even after all the monetary pump priming in recent years, from unprecedented amounts of quantitative easing (QE) and zero interest rates from the major central banks, world activity is still slowing down.

There are deep-rooted fears about a hard landing in China, some key emerging markets are in the grip of recession, Europe’s recovery is flat-lining, deflation fears abound and global policymakers are in disarray on how to tackle it all. Global political risks are on the rise, not least from the crisis in the Middle East, the latest nuclear sabre-rattling from North Korea and the threat of Brexit and a euro zone break-up in Europe. Investors could have their heads in the sand.

Given all this, it is no surprise that world trade growth has been steeped in negative territory for so long. Over the past 18-months, world trade has slumped as low as 14 per cent from a year earlier as global economic activity has slowed. With consumers, governments and businesses fretting about the future outlook, spending, investment and production plans are all being downgraded and slower global trade flows are the price being paid.

It is hardly likely to get better in the immediate future. Global sentiment surveys reveal the full extent of the growing pessimism. The Organisation for Economic Cooperations and Development’s leading indicators have been trending weaker for the past two years and are clearly heading deeper into negative territory. Meanwhile, global purchasing managers’ sentiment surveys show hopes fading and wavering on the cusp of global stagnation.

Stock markets might be back on a short-term roll, but sentiment is clearly being driven by the global glut of cheap and easy money, thanks to QE and zero and negative interest rates. The world economy has entered into a bizarre universe where investors are effectively being encouraged to take bigger risks in a world where secure and positive returns are becoming increasingly tougher to find.