The fears of a long drawn slump in global economies following the financial crisis were proved unfounded last year with world economies recovering smartly, driven by gargantuan fiscal and monetary stimulus injected into the financial system by various governments led by the US. Growth is back with a vengeance, but with a bigger problem which is solvency of governments and a bleak fiscal situation. If the world economies sang in chorus in 2009, the year ahead will be one of solos.
Going by consensus, global growth will better itself in 2010, although the uptick in leading indicators seen so far is woefully short of what has been seen in good times. For now, there are voices calling the current recovery in the western world unreal and unsustainable, but relatively more robust in the emerging markets. This year will be one of reconciliation with reality, and most likely scenario for markets is a consolidation process with sharp bear rallies (assuming we still are in one).
Yet, as it seems for now, gone are the days of risk aversion with the Chicago Vix trading at the lower end of the spectrum. A sustained weakness in the dollar coupled with a low interest rate has prompted investors to move funds away from the US. The Fed may not be in a position to raise rates anytime soon, but even a perception that it could may result in a stampede out of riskier assets. That is the key risk for emerging markets.
***
The dollar index has been gaining for the past few weeks, reversing its direction after several months, even as the stock markets across the world have been reasonably resilient (usually they share an inverse correlation). The dollar is perhaps moving up for the right reasons, but the direct correlation with stocks look unsustainable.