Forex Flash: Sluggish growth and falls in bond yields a normal phenomenon – Goldman Sachs (Barcelona) - According to the Economics Research Team at Goldman Sachs, “We have shown that post-bust recoveries and stagnations are – on average – associated with unusually sluggish growth and sustained falls in bond yields, though with steady recoveries in equity markets.” Moreover, using a ‘three-risk’ framework that a sharp downgrade to the market’s views of Chinese growth has weighed on global cyclical assets, we note that assets with US domestic exposure have done better.

“As such, a sharp reduction in Euro area risk perceptions has also been a key driver of the recent rally, reducing risk premia without boosting growth views much. However, the acceleration in the divergence between equity indices and more cyclically sensitive assets since the summer of 2011 suggests a need for more immediate explanations.” the Team notes.

The last episodic paradigm in which we saw similar patterns in assets markets came around the Asian financial crisis in 1997-98. There, the hit to global demand was, for many countries, offset by easier financial conditions and falling bond yields. As a result, investors saw strong rallies in assets outside the crisis economies that had limited exposure to the growth problems from the crisis but had benefited from the related easing.