The peak in global growth momentum can?t be far away ? a number of leading indicators have already turned or are close to turning.

Meanwhile, several negative factors have started to cloud the skies and people aren?t quite sure how they will interact to cause a possible storm.

We are, of course, referring to oil price increases, a rising interest rate environment, a potential slowdown in China and greater geopolitical uncertainty.

Not sure of the weather forecast, investors have been heading for cover with greater alacrity than usual, dumping riskier assets in the process. However, we should note that this is not a one-way street. Many will look for opportunities to take quick bites at risky assets.

Part of the reason why we have seen such quick reversals in previously-favoured investment areas is the notable presence of hedge funds.

These lads have grown substantially in the past couple of years, and while still much smaller than their orthodox institutional brethren, they are handier with the gun, willing to pull the trigger quickly.

We also know that they have tended to bulk up more than usual via leverage, with some of the biggest leveraged positions held by directional macro funds.

And, up to the present, the Fed has given free reign to the greedy by making it easy to borrow at rock-bottom interest rates and take additional risk. But now that policymakers have started sending smoke signals that the era of dirt-cheap money may be coming to an end, any money manager operating a half-decent risk management system will seek to unwind some of the riskier trades.

As for risk aversion among individual investors, it is also on the rise.

However, they tend to lag professionals in responding to changing market conditions. There is evidence that folks have been pulling money out of high-yield debt funds and emerging market equities. Overall, equity funds have experienced net outflows for three weeks running, as investors run to the safety of money-market funds.

But, they?ve been fleeing bond funds too, fearful of what rising interest rates can do to bond valuations.

Meanwhile, surveys of individual investor sentiment indicate greater bearishness than just three weeks ago.

The four risk factors we mentioned in the first paragraph are, as you may have guessed, endogenous and interactive.

The Fed?s stance on interest rate increases is partly premised on the degree of slowdown in China and the rise in oil prices. And, in turn, China?s policy tightening depends on how tough the Fed acts. As for oil prices, their strength is a function of the vigour of the US and Chinese economies, the main engines of global growth.

So how is this all likely to play out? The best bet is that China?s slowdown will be bumpy, but not a crash landing. And in the US, a degree of policy tightening has already taken place via market-determined interest rates, even without a move by the Fed. Oil prices are also doing their bit to slow down the economy. But inflationary pressures are sufficiently strong to require rate hikes from the Fed, sooner rather than later.

A productivity slowdown is underway, which will raise unit labour costs and squeeze corporate profits unless firms raise prices. To maintain confidence, the Federal Reserve cannot be seen to lose the initiative. They will have to give the appearance of being in control of events, even if in reality they may be reactive. They have to mop up some of the excess liquidity that they originally poured into the system without causing a lot of damage in the process.

In the eyes of G7 finance ministers, oil prices are misbehaving. Global growth may come off the boil in the second half of the year, but right now it?s hot enough to put pressure on tight supplies. There has been a lot of jabbering by the Saudis about pumping more oil, which hasn?t impressed the market, thus far. The royals have a political agenda too ? being close to the Bush family, they would like to help the president.

At the same time, they would like to impress the Americans that they are still an important player in the Middle East.

A lot of speculative money is now long on oil and this carries the risk that if we get a confluence of geopolitical and economic news flow that is oil-price negative, there could be a sharp correction.

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