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Equity markets not reflective of global economy

We should be well aware by now that global indices take little of their direction from the underlying economy.

All trading involves risk. Losses can exceed deposits.

In the past few weeks, investment analysts have been falling over themselves to reassess the outlook on China’s growth. Despite concerns, today’s number came in as expected at 7.5% and provided more than a shred of relief to the FTSE bulls, particularly anyone with exposure to the mining sector.

China growth slowing

However, with China posting 7.7% growth in the first quarter, growth is slowing, and there are signals that the trajectory is going in the wrong direction. One argument is that the country is subject to the ‘law of large numbers’, and that China's Ministry of Finance seems more than willing to let growth slide as it pushes through long-term reforms, including weaning the country of its reliance on exports and investments and encouraging more domestic consumption.

There was a time when anything below the 8% metric was considered something of a disaster, yet it seems that global investors have now come to accept data releases on the back of tempered expectations.

Forward guidance from the European Central Bank and the Bank of England, and a more dovish tone in Ben Bernanke’s speech last week, have helped to underpin equity markets. We can refer to this as a positive, yet it underlines just how central banks are at the mercy of the markets.

Mining sector correction overdue

Today the FTSE 100 is at levels not seen in seven weeks, and while the 6600 level remains an area of resistance, for now the mining sector is firmly in the driving seat. A quick glance at the FTSE 350 mining sector shows that trading action remains in a bearish channel, which has been in place since February. In fact, since December 2010 the sector has declined by 50%. A correction is overdue and this could signify that it is a good time to reassess the mining sector, given the downbeat news relating to the sector and the effect the sell-off has had on the put-upon Aussie dollar, which is currently trading at an almost three-year low against the US dollar.

Nothing goes in the same direction for an infinite period of time. In a week that has much focus on the present, as well as forward-looking inflation issues from the Bank of England and the Federal Reserve, plus US earnings season, we cannot rely on any one central bank to curb market volatility. In fact, some would say they provide much of it all by themselves.

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