Good, bad and ugly

Steady US jobs one facet of new rockier normal

Steady US jobs growth is just one facet of a new, rockier normal. July's employment report on Friday showed 209,000 nonfarm jobs added and the slightest of upticks to 6.2 per cent in the unemployment rate. That's decent if unspectacular job creation, and other data are solidifying as well. Yet Argentina's default, conflicts in trouble spots and a trade setback are among the darker clouds. Thursday's selloff in US stocks and its echo around the world hints at what could happen if investors refocus on the bad stuff.

A second-quarter US GDP rebound at an annual growth rate of 4 per cent was reported on Tuesday, and on Wednesday the Federal Reserve's statement sounded more bullish on the economy than before. The second-quarter earnings season is looking better than analysts have been expecting, with year-on-year growth in profit at S&P 500 Index companies running above 9 per cent so far.

The geopolitical picture is, however, less encouraging. Ukraine and Gaza have seen fresh unrest in the last few months, while the long-running civil war in Syria seems to have spread to Iraq. After talks failed on Wednesday, Argentina went into default again, the second time it has done so in the last 13 years, while a modest World Trade Organization pact - previously agreed and only in need of implementation - broke down on Thursday.

The US stock market appeared to wake up to these and other problems on Thursday, dropping 2 per cent, although that may also have reflected concern about the beginning of the end of the Fed's very generous monetary policy. Global markets also fell, and by noon in New York, the S&P 500 was down another 0.7 per cent.

Where the appetite for risk goes from here depends partly on where investors choose to concentrate their attention - on benign data, or on what could be rising trouble.

The VIX index of US stock market volatility has spiked, and after a lull that may simply be healthy.

Markets should respond to all kinds of signals, and higher VIX is indicative of reduced complacency. After all, even the most tranquil summer day can bring violent thunderstorms.