Deja vu as fear factor infects China growth

The global markets sailed in positive territory as long as the US Federal Reserve kept printing dollars. Andrew Harrer / Bloomberg News

While oil prices have recently been stable, global economic indicators elsewhere are worryingly reminiscent of 2008, when the slump really started to set in, Sean Evers writes.

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The lazy days of summer have a way of helping us see the wood from the trees. In retrospect, the holiday season for the West started with a somewhat delusional and stimulated economic recovery, and by the time the picnic blankets were being rolled up last month, the cold reality dawned that markets had become addicted to the sweet taste of abundant free money, and economic growth remained anaemic.

It was 2008 whiplash fear all over again, with a non-stop series of unbelievable black swans popping up, political kamikaze in Washington, a US downgrade followed by zero jobs growth and a Greek tragedy that just has no ending.

Yet oil prices remained above US$100 a barrel.

The talking heads barked better than 50 per cent odds that recession would return with the winter darkness in the northern hemisphere, and the most sober among them said it would not be a double-dip because the first plunge never went away.

They say football is a game of two halves, and this year feels very much like that. The first two quarters had all the optimism of a global recovery, despite the earthquake and tsunami in Japan and political unrest erupting across the Middle East and North Africa.

The Fed was happily printing cash to ensure all markets sailed in the luxury of QE2 (quantitative easing) and everyone forgot about Greece and the politicians for a while. When the holiday season started at the end of the June, the VIX, popularly known as the fear index, which measures the cost of using options as insurance against declines in the S&P 500, sat quietly well below the historic average of 20, and Brent was anchored north of $100. Perfect. Time to pack the sunblock and leave the BlackBerry on silent.

But the Fed turned off the money presses on June 30 and left the stage to the bitter hostility of the Republicans and the Democrats.

And at the same time the polite politicians of Europe hummed and hawed over what in the world to do about the rapidly growing pile of sovereign debt in the euro zone. The VIX fear index tripled.

Meanwhile, oil prices bumped up and down a few dollars, but essentially remained stable. Brent went above $100 in February and since then has remained stuck within a stone's throw of $110, regardless of the world's biggest economy adding nearly 250,000 jobs in April or none in August.

Can Brent hold its steady elevated perch as China, the world's second-largest economy and energy consumer, joins the doom and gloom headlines? An HSBC Chinese purchasing managers' index fell to a record low last month as new business growth moderated, adding to evidence the economy is slowing after the government raised interest rates, curbed lending and limited property purchases.

Options to protect against declines in Chinese stocks are about the most expensive in four years as traders lose confidence in forecasts for a rally by Credit Suisse, Morgan Stanley and Deutsche Bank.

If the China wobble becomes a stumble, we may see a repeat of the fourth quarter of 2008, when crude fell through the floor.

Sean Evers is a managing partner of TheGulfIntelligence.com