This Friday was a difficult one for global equity markets. U.S. equities finished lower for the fourth week of the last five, suffering their largest drop since 2014. Lower GDP growth in the U.S. and negative earnings revisions only fueled the fire of global deflation. Geopolitical unrest in Russia and Greece’s new anti-austerity stance didn’t help either, and Spain could be next…

Rates collapsing on U.S. GDP miss. The 10-year treasury dipped to to 1.7% on Friday, and 30-year rate fell to all time lows of 2.7%. This was partially driven by the fact that U.S. GDP growth missed expectations on a 2.6% print. Our team at Market Realist has been calling for slowing growth since November, due to the strengthening U.S. dollar, weakening exports, and weakening local energy economy.

Low oil prices may eventually be positive for consumer spending, but are very negative for the U.S. energy industry. With crude oil at $47, many U.S. based shale drilling projects will be closing down in 2015, resulting in increasing unemployment in Texas and the Dakotas. The stronger dollar will also make U.S. capital goods and exports less attractive overseas and will negatively affect S&P 500 earnings. Already, companies like Caterpillar and Microsoft have missed EPS due to currency issues.

This earnings season, 87% of U.S. companies have guided EPS growth lower. In addition, S&P 500 earnings for the 4th quarter are currently looking to miss expectations by as much as 7%. The information technology (IT), consumer durables, and manufacturing sectors have been hit the worst so far, as they tend to sell more of their services overseas.

ECB threatens Greece with banking cut-off. After Greek Finance Minister Yanis Varoufakis said that Greece won’t try to extend its bailout agreement, the ECB put its foot down and threatened to cut-off funding to Greek banks by February 28th if there wasn’t agreement on current bailout terms. Germany and Angela Merkel have ruled out write-downs for Greek debt, while the Greek Syriza party stands opposed.

Spanish mob rises in sympathy for Greece. Tens of thousands of protesters affiliated with the leftist Podemos party also rallied this weekend after the anti-austerity triumph in Greece last week. Podemos, which means “we can” in Spanish, has jumped to the #1 political party in Spain in opinion polls. The party is promising higher wages and more public control of the economy, exactly what Europe’s austerity policies have been trying to prevent. According to the Guardian, 100,000 people filled Madrid’s central Puerta del Sol this weekend, chanting “tick-tock, tick-tock,” as Spanish local and national elections loom closer. Many Spaniards have been seen waving Greek flags in the square. While this call for transformation is a result of slowing GDP growth and rising local unemployment, Podemos does not bear the solution. If Spain’s government deficit rises and austerity policies fail, its interest rates could spike again, and things could get much worse before before they get better.

Russia surprisingly lowers interest rates as economy freezes. After the Russian Central Bank vigorously increased interest rate to prevent inflation, economists were surprised to see a cut to rates so soon on Friday. As a result, the Russian ruble weakened to 72. Putin may be to blame, as a week ago, one of Putin’s aides urged that high rates were slowing down GDP growth. It may be too late for Russia anyway, as the economy will probably suffer a 6% GDP decline this year due to low energy prices, economic sanctions, high inflation, and rising unemployment. Known as stagflation, rising inflation and slowing growth is one of the worst scenarios for an economy.

Japanese easing policy not working. In Japan, housing starts fell 14.7% in December, vs. -14.3% in November. Japanese industrial production also grew less than expected in December, at 1.0% month-over-month and 0.3% year-over-year. Abenomics doesn’t seem to be doing its job in Japan, just like Mario Draghi (Super Mario) seems to be failing at his job in Europe, as the real economy continues to be sluggish.

China’s factory production fell for first time in 2 1/2 years. The official Chinese PMI index also fell to 49.8 in January, the lowest level seen since September 2012. A decline in exports to Europe, flagging housing sector, and a state-led slowdown in investment has led to this state of affairs. The Chinese service sector PMI also fell to 53.7, which is the lowest reading since January 2014.

So why are U.S. stock market valuations at all time highs? Why is the European stock market index P/E ratio at 22.0? Why has the Shanghai stock market index rallied 40%? Can someone please explain this to me? Until next time…