financial markets are struggling midweek in the face of a growth downgrade from the World Bank as risks refuse to moderate. Be it slowdown in China’s real estate markets, instability in the Ukraine or fallout from gradually tighter monetary policy over time, threats to the health of emerging markets continue to haunt the outlook. In its 154-page report the Bank slashed 0.4% off its 2014 forecast for global growth although hopes for acceleration in the latter part of the year. It hopes the next two years will deliver a brighter outlook especially for the developed world. Growth will be 3.4% in 2015 and 3.5% in 2016. However, the concern centers around developing nations, where 2014 is set to deliver flat growth compared to 2013. This would mark the third-straight year of sub-5% growth even as major world economies return to growth. The outlook for the next couple of years lifts its forecast to as high as 5.5%.
Equity futures(CME:ESU14) are lower by almost 10-points one-hour ahead of the opening bell. Investors can’t seem to hide their disappointment with the report. Perhaps the early feeling among bearish investors comes from the view that the economic recovery on the other side of the global financial crisis was supposed to recalibrate the engines in developing markets. Not only is that proving to require more fine-tuning than expected, but also the World Bank continues to stress the risks associated with its outlook that could easily derail the recovery. The euro area recovery could be thwarted by physical disruption to grain or energy supplies from Russia to Ukraine. Rising capital costs are inevitable across developed markets over the next five years as monetary policies reset. That implies weaker financial flows to developing markets says the report. The potential for significantly higher U.S. yields is likely to cause a re-run of last year’s emerging market turmoil as the firmer borrowing costs are rudely blown offshore.
As U.S. markets recoil from record highs, we’re pretty sure we can hear investors complain that this isn’t the way the recovery was supposed to work.