Salient to Investors:

Nouriel Roubini at NYU said:

There has been a global recovery in the last year with the US recovery and reduced tail risks of a eurozone breakup and a hard landing in China.

The US economy recovery is very fragile, with barely 2% GDP growth expected in Q3, and the improvement in the labor market is partially due to a lower participation rate. US government spending is still falling, a fiscal drag, capital spending is weak, housing is softening, flat consumption in July, and net exports are worsening.

The Fed may taper in September but with the 10-year T-yield close to 3% so any further tightening will hurt the interest rate sectors like housing and capital spending. Any Fed tapering in September should be accompanied by a very dovish statement: a hawkish statement would push 10-yr T-yields well above 3% and choke the economic recovery.

The Eurozone is improving but the problems in the periphery remain unresolved: 5 of the 7 peripherals remain in recession. While the tail risks of a Greek exit and Italy and Spain losing market access have been significantly reduced, the fundamentals problems of the periphery have not been not resolved:  low potential growth because of slow reform, public debts well above 100% of GDP for Italy, Spain and other peripherals that will keep on rising, problems of competitiveness. and some improvement in current accounts that are cyclical due t the recession and not structural.

Italy government could collapse if Berlusconi’s threat to pull the plug on the government unless he gets a pardon or avoids prison is not a bluff, the government will collapse and there will be elections before year-end and the chances of a government lasting more than a year and structural reforms both of which the country needs are relatively low.

The Greek government could fall within 6 months. Portugal and Spain have political uncertainties. Europe has austerity fatigue in the periphery and bailout fatigue in the core.

If attack on Syria is surgical and last only a few days then the further effect on oil prices will be moderated: if the conflict escalates then oil prices would be longer and more persistent and significantly damaging for all oil importing countries.

Emerging markets have had the double whammy of Fed tapering and rise in bond yields and the slowdown of China which has led to a fall if not the end of the commodity super cycle.  India, Indonesia, Turkey, South Africa, Brazil all have current account deficits, fiscal deficits, falling growth, inflation above targets, and social and political problems and elections within the next 12 to 18 months, and ugly policy choices. However, most of these countries are in better shape than in previous emerging market crises in the past decade crises with more flexible exchange rates, war chest of reserves and less currency miss-match so do not expect a repeat of the massive yen crisis of 10-15 years ago.

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