As we were…..yesterday markets quickly returned back to a point of optimism as economic data in both the US and Europe continued to point towards the global economy recovering. This does not mean that there is not a case to answer on whether the markets have already discounted the most optimistic scenario but for now at least investors will probably wait until we see the first round of third quarter earnings later this week before making a further judgement on just how much good news has already been priced in.

Further signs of economic recovery and optimism can be seen in Australia with the central bank hiking interest rates earlier this morning. Economic data from Australia has been particularly strong in recent weeks with a strong rebound seen in both retail sales and housing, boosting consumer and business confidence. However, the unemployment rate has continued to rise and later this week economists are expecting it to show a further deterioration to 6% from 5.8%.

The move by the central bank may well raise a few alarm bells on the potential removal of stimulus policy in other countries. The US Federal Reserve has never hiked interest rates when the unemployment rate was still rising and given the disappointing employment data last Friday an early move by the Fed is unlikely. The same is also true of the UK where the BOE focus is more skewed towards increasing quantitative easing in the future (possibly November) rather than contemplating taking away stimulus policy. However, there are similarities to consider: in both the US and UK we have seen an improvement, although from an extremely low base, in housing data whilst retail sales in both countries have been surprisingly robust given the economic backdrop. But this observation does need to be viewed from a relative basis with Australia arguably experiencing a milder dip in economic activity over the past year.

Saying that, a warning shot has been delivered, reminding investors that the low interest rate environment can not last indefinitely. It is when the economic rebound has to be sustained from private sector growth will the real test of the strength of economic growth begins.

Sources: Reuters: BBC: Bloomberg: Lawshare: Deutsche Bank (db): Proquote: Financial Times: Wall Street Journal: CLSA: Sharescope: Market News. Capital Economics: CNBC: Wikipedia:

Please note this report provides a guide to some of the relevant areas that individual investors should consider discussing with an authorised adviser in relation to their specific circumstances, it does not constitute individual advice. As a result no action should be taken or refrained from being taken as a result of its content.