# A fortnightly look at global financial markets
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2017-12-12
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: Market Sentiment Boosted by Strong Economic Data and
Meta Description: Stay informed on the near-term market sentiment and key investment trends, including insights on Bitcoin prices, U.S. yield curve dynamics, and global GDP
URL: https://financedigest.com/a-fortnightly-look-at-global-financial-marketshtml

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By **Tom Elliott**, deVere Group’s International Investment Strategist

**Near-term market sentiment:** Less nervous, with most risk assets having more than regained the losses sustained mid-month. The MSCI World index is now 20% up in USD terms, 16% in local currency terms. The S&P500 continues to reach new all-time highs, hitting 2,627 yesterday. A combination of good economic data, from Germany in particular and the [euro zone](https://www.financedigest.com/euro-zone-bond-yields-rise-after-u-s-jobs-data.html "Euro zone bond yields rise after U.S. jobs data") in general, and minutes from the Fed’s last policy meeting that suggested -to some analysts- a slower pace to interest rate rises for next year than expected, has helped investor sentiment. Appetite for risk assets is perhaps illustrated in recent Bitcoin prices, where we have this week seen the price [nearly double](https://www.financedigest.com/uks-micro-focus-shares-nearly-double-after-canadas-opentext-agrees-6-billion-takeover.html "UK’s Micro Focus shares nearly double after Canada’s OpenText agrees billion takeover") from the month-low of $5,800 on November 11th.

**Outlook:** A comment on the flattening of the U.S [yield curve](https://www.financedigest.com/world-shares-rise-u-s-yield-curve-inverts-after-strong-jobs-data.html "World shares rise, U.S. yield curve inverts after strong jobs data") is called for. The spread (ie, difference) between the 2yr and 10yr [Treasury yield](https://www.financedigest.com/world-equities-fall-u-s-treasury-yields-rise-after-hawkish-fed.html "World equities fall, U.S. Treasury yields rise after hawkish Fed") stands at just 0.59%, a near low for the year. There has been much talk in recent [weeks that the narrowing of long/short bond](https://www.financedigest.com/shares-and-bonds-nervy-as-rate-hike-week-looms.html "Shares and bonds nervy as rate-hike week looms") spread heralds an imminent recession. Apparently every U.S recession since WW2 has been preceded by a flattening -and an eventual inversion – of the Treasury [yield curve](https://www.financedigest.com/u-s-yield-curve-inverts-after-strong-jobs-data-world-shares-mixed.html "U.S. yield curve inverts after strong jobs data; world shares mixed"). Why else would investors accept a relatively low premium for holding long dated paper, with the risk of [inflation eating](https://www.financedigest.com/uks-hot-labour-market-cools-and-inflation-eats-pay.html "UK’s hot labour market cools and inflation eats pay") away at the real value of the yield, unless they believed that long term inflation will be weak? And why would inflation be weak? The implicit answer is: because of a recession. For [market bears](https://www.financedigest.com/aerospace-bearings-market-to-register-stellar-compound-annual-growth-rate-through-2026.html "Aerospace Bearings Market to Register Stellar Compound Annual Growth Rate Through 2026") the flattening of the yield curve is therefore a Matter of Significance.

But many instances of yield curve flattening have _not_ been followed by recessions. Indeed, as we discussed a fortnight ago a recession in the U.S, or in any major economy, appears unlikely -at least in the near term – given the recent upgrades to world [GDP growth](https://www.financedigest.com/spain-q2-quarterly-gdp-growth-revised-to-1-5-from-1-1.html "Spain Q2 quarterly GDP growth revised to 1.5% from 1.1%") by major financial institutions, notably the IMF in October. The increase seen in global corporate earnings in [third quarter results](https://www.financedigest.com/polands-bank-millennium-third-quarter-results-hit-by-payment-holidays.html "Poland’s Bank Millennium third-quarter results hit by payment holidays") appears sustainable. Fears that the Fed may accidently tip the U.S into recession by raising [interest rates](https://www.financedigest.com/ecb-needs-to-keep-interest-rates-sustainably-high-to-combat-inflation-lagarde.html "ECB needs to keep interest rates ‘sustainably high’ to combat inflation – Lagarde") too high, too soon, are overblown. Its [monetary policy](https://www.financedigest.com/asian-economic-powers-warn-of-risks-from-war-monetary-policy-normalisation.html "Asian economic powers warn of risks from war, monetary policy normalisation") tightening – which includes the unwinding of its quantitative easing program-  is likely to continue to be done at a cautious pace, and ‘data dependent’, when Jerome Powell takes over as chair, in February.

The [risk of an imminent recession](https://www.financedigest.com/euro-zone-bond-yields-fall-as-ecb-policymaker-flags-recession-risk-gilts-eyed.html "Euro zone bond yields fall as ECB policymaker flags recession risk, gilts eyed") in the U.S are therefore slight, and so long as corporate earnings growth persists against a backdrop of around 3.6% global GDP growth, a sustained bear market for risk assets in the near future appears unlikely. But this is not to exclude the risk of near-term market correction – often defined as a fall of around 10% – that may happen if end-of-year profit taking triggers a more broad sell-off, particularly by leveraged investors. I expect the current low risk-free rates on offer to investors (eg, [bank account cash rates and core government bond yields](https://www.financedigest.com/analysis-banks-lag-bond-yield-surge-as-recession-worries-trump-cheap-valuations.html "Analysis-Banks lag bond yield surge as recession worries trump cheap valuations")) will limit the extent of any such correction, and that bargain hunters will swiftly step in and a sharp recovery will follow.


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