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Global and US Recession: Hyped, or a High-Probability Scenario?

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Fundamentals deteriorating

US gross domestic product (or GDP) expanded by 0.7% in 4Q15, indicating sluggish growth and the impact of the global slowdown scenario.

The marginal growth in 4Q15 was driven by consumer spending, which is expected to fall as holdings and wealth fall due to a slowing economy and equities. Economists expect a higher probability of a recession outside of the United States than domestically.

The US unemployment rate fell to 4.9% in January 2016 compared to 5.0% in December 2015, reflecting stability on a microeconomic level. Federal Reserve vice-chair Stanley Fischer voiced concerns over the global equity rout, stating, “Global market volatility could lead to a persistent tightening of financial conditions, which in turn could signal a slowing in the global economy that could affect growth and inflation in the United States.”

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Bonds rally

Investors have shifted to Treasuries and government bonds across major developed economies. The yield for Japanese benchmark 10-Year bonds (JGBD) has fallen below zero for the first time. Japan’s TOPIX has fallen by 6%, and 10-Year bond yields stand at -0.01%.

US Treasury yields (SHY) are approaching all-time lows achieved in 2012. These yields are reflective of panic present among investors regarding a possible recession in the global economy.

Retail participation

Banks and asset managers are targeting retail players for the deployment of funds or borrowings. BlackRock’s (BLK) retail business had assets under management (or AUM) of $541 billion as of December 31, 2015. Retail business AUM formed 13% of the company’s total AUM.

Retail long-term inflows for the quarter stood at $7.0 billion, of which $2.8 billion came from the United States, and the remaining amount came from international markets. State Street (STT), Vanguard, and major banks such as JPMorgan Chase (JPM) are vying for retail participation to boost their domestic businesses.

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