A more aggressive ECB stance, suggested by Draghi at the last meeting, would help reduce risk premia in European equity markets, as reflected by the 10% rise in the Euro Stoxx index since it closed on 25 July.
But a sustained rally in global equity markets would likely require some improvement in global growth expectations. As yet, the evidence is mixed. Several economists have further cut expectations for Chinese growth since the latest batch of disappointing figures (July’s trade, lending and industrial production data) and now expect growth for the year to come in below 8%.
Various indicators (PMI surveys, industrial production) continue to suggest the eurozone is in recession.
In the US, employment data (non-farm payrolls, weekly jobless claims) are supportive, as is the steady improvement in the US housing sector, but the ISM manufacturing survey remains soggy, below 50.
In several emerging markets, trade flows have weakened and industrial activity has disappointed.
Our base case is that global growth will pick up modestly in the second half of 2012 in response to policy easing in China (and other emerging markets such as Brazil). Moreover, recent US labour market and housing data are reassuring; although in Europe, we expect only a modest improvement at best.
The debate over the looming US fiscal cliff, therefore, poses a significant risk to global growth prospects if increased uncertainty sparks spending cutbacks in the private sector. This will be a key risk to watch as the US election campaign heats up.
We are reminded that economists have generally failed to spot turns in the global growth cycle in recent years and markets will move several months before the economic data confirms a new trend. While there are some reasons for optimism following the recent global slowdown, we remain fairly cautious in light of the continuing challenges facing the global economy.