Futures in the US are down today after a long weekend at which time the IMF updated its global outlook lower. This was reinforced by China reporting its weakest annual expansion since 1990. A lot of this news from the US side is going to be priced in this week, but overall the news didn't seem to have too much of an effect on global markets. The reason for this could stem from the sell-off in December, when all of the companies started to issue profit warnings about growth in China. Markets sharply sold off (some argue too much) on the expectations that the bad news will come out in the figures this month.
What does this mean longer term? There is more evidence that economies are slowing and this will affect the markets. It will also dampen the market sentiment we have seen since the start of the year where stocks were coming off the December bottom thinking the sell-off was too severe. A January rally of about 10% and data now confirming that there was a slowdown in key markets should pause the bullish sentiment on the markets until data points towards recovery or more contraction.
Concerns about the debt loads in China and the US should be looked at in terms of timing. The ability to manage these large debt payments will become harder as the economy slows down, exacerbating the problem as companies, individuals, and governments try to deleverage. In the deleveraging process there are 3 main ways to manage the debt: Extend maturity, restrict growth and paydown, and default. Extending maturity, especially in the US, will be difficult in a higher rate environment, also the markets are now demanding more premium in spreads over lower quality loans. This leaves the other two options, where the countries will have to muddle through payments and manage those obligations over growth or in the event that is unmanageable, default. These two options are not great in terms of global growth prospects turning around in a short time frame. With rates higher in the US (and the Fed willing to pause and possibly even cut in the future) and the Chinese government starting to add stimulative measures to their economy, mass defaults should not be common. This leaves economies, and their markets muddling through the soft patch, subject to data and bouts of volatility, a great time for income and buying opportunities.