Global financial markets have adopted a more positive tone in recent weeks. Equities are hitting new highs, and the yield curve in the government bond markets is beginning to correct a small part of the “inversion problem”, which I discussed last week.
In the course of the decade-long equity bull market since the global financial crisis, there have been several temporary phases of relative weakness that ended with extremely powerful surges in risk assets. These occurred, notably, in 2011-14, following the eurozone crisis, and then in 2016-18, following the China devaluation shock. This latter phase was dramatic, involving a cumulative rise in world equities of 60 per cent from February 2016 to January 2018, according to the FTSE Global All Cap Total Return Index.
There are certainly some similarities between what is happening now and the inflection point in the world economy in 2016. Is it possible that asset markets are embarking on a repeat of the euphoria seen in that period? Market psychology is always unpredictable, but it seems unlikely.