Index Aug12.pngFundamentals eventually determine financial market directions. But sentiment, when supported by strong financial flows, can take them in opposite directions for considerable periods of time.

Thus the latest IeC Boom/Gloom Index continues to do its job of charting the battle that is underway:

• The Index itself (blue column) weakened in July
• Similarly, the S&P 500 (red line) remained range-bound around 1370

If this was a boxing match, the announcer would probably be telling us:

• In the blue corner, signs of slowdown in all 3 major economies – EU, China, US. Major companies such as Dow and BASF are airing their worries about the H2 outlook
• In the red corner, policymakers are talking of more stimulus action – saying they will do ‘whatever it takes’ to save the euro, promising to increase spending on major infrastructure projects in China, and discussing new financial options in the US

So which story is the humble chemical executive to believe? The answer is the blog’s old friend, scenario planning:

• It would be foolish to ignore what is happening in front of our eyes. So contingency plans for a slow H2 are essential
• Equally, we know that policymakers can create major bursts of activity, as in 2009. So companies must also prepare for more volatility

The underlying issue is that in today’s VUCA world, we all have to keep a careful eye on political developments, as well as focusing on the short-term economic picture.