It looks to me as though the market has come to terms with the idea that the US economy is slowing. It also appears that the market expects the US to avoid a second full-blown recession and limp along slowly for the next quarter or two. Bad is okay, so long as it doesn’t get badder…
What the market did not expect was the European economy to show the resilience that it has thus far in the face of a sovereign debt crisis that nearly ended the European experiment. Asia continues to grow robustly, as do emerging markets.
If we view the global economy as a 5-cylinder engine, you have the US struggling, Asia more or less booming, along with emerging markets. Europe is unexpectedly humming –for now– (including the UK) and Japan is benefiting from Asian strength but not doing as well as it might. Taken together, you have a macro backdrop that is significantly brighter than we assumed just a month or so ago.
If it continues, it also suggests the US may yet right itself, especially if the government begins to bow to electoral considerations and moderates its policies to avoid chaos at the ballot-box come November. All this argues for better risk appetites in the next few weeks and months in my view…
