A spate of selling on China's stock markets at the beginning of the month was pretty much ignored by major bourses in the rest of the world.The common interpretation was that the correction would have a primarily domestic impact and not a world-wide one. More recently, we have experienced a sell-off in Europe and America, broadly reflected on other global markets, that is based on the fear of rising inflation and higher interest rates.

Central banks are either raising rates or, as in the case of the Fed, standing still. Previous hopes of easing by the Federal Reserve have been dashed by an apparent rebound in the US economy. Meanwhile, inflation is proving to be quite stubborn. If the economy continues to show strength, then tightness in capacity utilisation and the labour market implies a higher risk of inflationary pressures.

Bonds have been re-priced across the world, with yields on longer-dated issues spiking higher. Many ten-year government benchmark yields have risen to multi-year highs. The sell-off is a normal reaction, given the increase in risks faced by bond investors. However, in the short-term there may be a pullback after overshooting.

The sharp rise in yields may endanger the easy credit conditions that have sustained the boom in equity buyouts and M&A. And, of course, corporations will find it more expensive to borrow on capital markets. Spreads on higher-risk corporate bonds have widened from previously tight levels. Meanwhile, credit default swaps have risen in price, as measured by Crossover Indices. In other words, the cost of insuring corporate debt against default has increased.

Stock markets are wobbly because they have been feeding on easy liquidity for a long time and any possibility that it may be siphoned off results in a bit of reflection among investors. Generally, prospects of higher interest rates and resilient inflation are a bad mix for stocks.

A collection of recent data releases depict a perkier US economy, pointing to a pick up from the slow pace of growth in the first quarter. Meanwhile, the inflation picture is a little troubling. The latest data on productivity growth was weaker and unit labour costs more elevated than expected. So the Fed is forced to strike a pose of being vigilant regarding inflation. If not, the bond market may extract an even bigger premium for inflation risk.

The job market is still fairly tight and employment creation sufficient to keep consumers afloat. Until recently, stock market gains have helped to shore up consumer confidence, even as rising petrol prices have acted as a negative factor. Meanwhile, the housing market is still in the doldrums, with no rapid turnaround in sight.

Construction has been a weak sector and, as a consequence, many analysts were expecting a rise in unemployment. They have been scrutinising data for a rise in claims that has, unfortunately, failed to materialise. The mystery can be explained by the fact that a good part of the labour-force in the construction industry is composed of illegal immigrants.

The migrant workers were never counted as being part of the labour-force in the first place, and they certainly don't show up in the claims figures because they are ineligible for benefits. So employment in the construction industry has indeed shrunk but is not captured in the official statistics. This is another example of why it is necessary to interpret data with care rather than to take it at face value.

The American consumer is still showing greater resilience than expected. There is a saying that it is not a good idea to bet against this committed spender, and in recent years this has generally been the case. Time and again, US consumers have surprised forecasters by their tendency to spend more than expected.

A fundamental reason for this phenomenon is to be found in the relative stability of the macroeconomic environment in recent years. Households have not experienced volatile income and inflation. Naturally, they expect this to continue into the future and consider negative developments, in the present, to be temporary. Without Asian willingness to finance American consumption habits, the mild recession in 2001 would have been more severe, leaving a nasty memory and making consumers more cautious in their spending / saving behaviour.

At the G8 summit in Germany, it appears that a temporary truce was declared between America and Russia in their squabble over the Bush administration's desire to install a missile defence system in some Eastern European countries that were once members of the Soviet bloc. Putin cooled mounting tensions by his clever suggestion of locating the installation in Azerbaijan. The yanks were caught by surprise and could only respond that the suggestion needed further studying.

Putin has been reconstructing state power and centralising authority over a number of years. Those in Russia who have disagreed with him and stood in the way have been neutralised. He is not necessarily out to get the robber-barons, who built their fortune in the Yeltsin era, if they cooperate with him. Those who chose to oppose are either in jail or in exile.

Russia does not have a strong democratic tradition. For most of its history, it has been ruled by autocrats. Among the notable ones, there was Peter the Great and Catherine the Great, who were so called because they were strong-willed and got things done. Anyway, that's the entry in the school history books. Ivan was also a doer but didn't have a good publicist and ended up being called Ivan the Terrible.

As for Vladimir Putin, according to the polls, he is popular in Russia. He is identified with stability at home and greater prestige abroad. It was inevitable that after putting order back in the house he would start flexing muscles on the world scene. A helpful factor is that the sharp rise in energy prices over the past few years has revived the Russian economy.

In a speech delivered at an international security conference in February he set out his vision of the international order and Russia's place in it. Basically, he was calling for a multi-polar world and an end to American hegemony. It was a frank speech that alarmed the audience of Europeans and Americans because it was direct and shorn of diplomatic fluff.

The likelihood is that Russia will continue to be assertive in furthering its interests in the global arena, and this will cause frictions with the United States and even Europe. However, recent talk in the media about the commencement of a new Cold War is exaggerated. The world is more intertwined economically and politically than ever before, which necessitates a degree of cooperation among rivals. At the same time, the transition from US hegemony to a multi-polar world is unlikely to be entirely smooth.

Iraj Pouyandeh is a Strategist and Senior Portfolio Manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com