Reuters article: global economy recovering but deflation a threat

According to recent Reuters polls, global growth will accelerate next year. But, as we warned in our latest newsletter, the International Monetary Fund (IMF) warns that the risk of deflation threatens to derail the improved economic picture.

The IMF is not alone. The chief economist of banking giant HSBC is concerned that inflation may “continue to sink over the next two years.”

This is not good for emerging markets. Inflation is falling in the developed world, while rising in developing countries. This is exactly the opposite of what they need: as their products become more expensive, they lose competitiveness in the global marketplace. One only needs to look at the Asian or Latin American stock market indices in comparison with the US and European counterparts to see how much this is true.

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Brace yourself for the upcoming bond rollercoaster

Whatever your opinion of where interest rates are going may be, chances are high you will be wrong. The level of uncertainty is the highest we have seen in years, and it has turned fixed income into a volatile asset class. This makes good old cash a more attractive alternative for those looking for safety in a portion of their portfolios.

The problem lies on falling inflation expectations. While lower inflation is typically a good thing, it is so low right now that it is edging closer to deflation. This is true in the US and the Euro area, and there are also signs that China and the UK are experiencing unwelcome drops in their inflation readings. Read the entire newsletter here.

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