A big hairball of risk

The three biggest problems worth reconsidering. By The Economist.

PERHAPS the most disconcerting aspect of the world’s current flight to safety is the lack of a single overriding threat to justify it. China is slowing, but hardly in recession. Europe is in crisis—but when has it not been in the last three years? And America—well, there’s that fiscal cliff later this year but it’s hard to find any investor thinking that far ahead.

The puzzle was underlined by May’s weak jobless report in America. What fundamental factors could explain it? Consider the usual suspects:

1. Petrol prices rose much less this year than a year ago, and peaked in the first half of April. Retail sales, the most obvious place where petrol prices would be felt, didn’t signal distress.

2. The current episode of European stress can be traced to Spain’s announcement in early March that it would miss its deficit targets, but equity markets in America didn’t take notice until the Greek elections in the first week of May. That’s too late to explain a slowdown that began in April.

3. Emerging markets are slowing sharply. But even after extraordinary growth, exports to China, Brazil, India and Russia only equal 1.3% of American GDP. And a slowdown in emerging markets would be ambiguous for America by both hurting exports and pulling down oil prices. (Full reading here).