The underlying trends seen this year have continued, but after strong follow through in Asia, a more subdued tone has been seen in Europe. The US dollar is generally softer, except against the yen and sterling. Japanese markets were closed for holiday, but the MSCI Asia-Pacific Index rose almost 0.3%, lifted by more than a 3% rally in China on speculation that there may be a sharp increase in the cap on foreign investors’ ability to invest in Chinese equities.
In Europe, the Dow Jones Stoxx 600 is hp about 0.4%, led by a rise in financials. Spanish stock market is at its highest level in almost a year (Feb 2012) and Italy’s market is at its best August 2011, though their bond markets are seeing some profit-taking today. With a light economic calendar in North America today, Bernanke’s speech in Michigan after the markets close may be the highlight.
We identify six key factors shapin
First, and perhaps most importantly, there has been a perception that the global economy is in better shape than many had feared. ECB began pushing down the tail risks in Europe. The EU helped by signaling it is prepared to give several countries including Spain, Italy and France more time to reach their deficit targets. The Basel Accord’s more liberal definition of liquid instruments and a longer period for the adjustment also encourages risk taking. China’s economy appears to have found a base after seven quarters of slowing growth. US politicians averted the worst of the fiscal cliff, which means the recession the CBO warned, is significantly less likely.
Second, reports of the demise of Keynesian economics has been grossly exaggerated. Japan, the world’s third largest economy, is pursuing Keynesian policies as aggressively. Before the weekend, the government unveiled a JPY10.3 trillion (~$116 bn) stimulus program. It forecast that the new spending (which will require new borrowing), will boost growth by 2% and create 600k new jobs.