The summer rally has taken the S&P 500 up 9.5% from the low of last June. Most other equity markets have also moved smartly higher as “risk on” sentiment became dominant. Bonds have reacted similarly with strong rallies in the troubled debt markets (e.g. Italy and Spain) and sell-offs in safe haven markets (e.g. Germany, U.S., Japan, Canada).
The “risk on” investment cliché describes markets since the rally began. However, our view of the world is that none of the major investment risk factors have eased in any fundamental way. What has changed is the perception—misplaced according to us—that the eurozone is in the process of resolving some key problems, thereby improving the odds of making the euro viable.