A new report from banking and investment giant Credit Suisse argues that the recent volatility in global financial markets reflects a tension related to uncertainty and the expectation of growing divergences in national and regional economies over the next few quarters.

The September 8th report from CS analyst Ric Deverell and the Credit Suisse Fixed Income Research team “pulls together many of the competing threads and concludes that the US can go it alone. Many EM countries require profound structural adjustments, but the offset for US demand is the boost from low commodity prices. We are more concerned about the transmission mechanisms from financial market turbulence causing the market to conclude there has been a policy mistake.”

Global economy dealing with strong crosswinds

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According to Deverell and colleagues, the recent across the board disappearance of risk appetite reflects a “market dealing with strong crosswinds.” They highlight some of these crosswinds for the global economy in their report, including:

China suffering from a gradual economic malaise which is likely to continue its downward trend for some time.

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U.S. and European labor markets and consumer spending remain reasonably good. The Credit Suisse analysts say that the Fed hike cycle will commence after markets have calmed down a bit. They suggest December as the most likely date for the Fed to pull the trigger, but September (next week) is still a real possibility.

Financial assets (both bonds and stocks) have been moving up since 2012, and “markets are typically fragile after a strong run.”

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Moreover, keep in mind that emerging markets and commodity prices are exposed to all of these crosswinds. All of a sudden dollar debts are becoming more difficult to pay because export revenue is slipping. Not surprisingly, quite a few central bank reserve managers are selling now to mitigate risk.

Of particular note, three major macroeconomic trends of the last decade and a half – a weak dollar, historically high commodity prices and emerging market optimism – have all turned simultaneously.

Growing divergences between EMs and DMs

Deverell et al. suggest that these global economic crosswinds are likely to result in increased divergences between most EMs and the developed world over the next few quarters. They point out that while developed market households will clearly benefit from ongoing low energy prices, they are also likely to face increased financial market volatility for some time.

They also highlight that the key economic uncertainties for now are centered around Chinese growth (can the Chinese economy avoid a hard landing?) and U.S. labor markets (just how exposed is the U.S. economy to global economic conditions).

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Finally, the CS analysts offer their projections for the rest of the year: “We expect ongoing malaise in China and a modest negative hit to developed market growth, including the US labor market. We have cut our global industrial production forecast for the second half. We still think the Fed will hike in 2015. But the high volatility asset market environment is likely to persist. Weak Chinese investment will likely be a persistent feature of the world economy in the quarters ahead.”