[Calxy]

Investors’ focus is increasingly away from the inventory-led rebound and towards
the issue of the sustainability of the upswing, placing greater emphasis on the reversal of the monetary and fiscal policy accommodation. ‘Risk off’ trades have become more prominent across the commodity complex, equity markets and lower quality corporate credit.

Against this background, rate markets continue to trade well, especially considering the heavy supply of government securities coming to the market this week. Yesterday’s price action was particularly supportive for the front-end, with EUR LIBOR fixing a whisker above the 1% threshold, and the auction of US 3-yr T-notes well received. Interest rate volatility has started subsiding more meaningfully.

Slow Recovery, But a More Balanced World
The recovery in final demand in the major economies, and in particular in the US, will be sluggish. This will result in further downward pressures on wages and prices, particularly those of services ex energy. In this respect - EUR inflation is finally starting to come down. 5-yr inflation swaps are back below the ECB’s 2 percent target, and could decline further.

The greater resilience to shocks of the larger emerging market economies (the BRICs, primarily) together with the vast amount of policy stimulus in the pipeline in the advanced countries will be helpful in stabilizing nominal activity over the coming years. Meanwhile, the rebalancing of the global economy is continuing in earnest, underpinned by the ongoing policy support. The upswing should be less lopsided than the last, contributing to a decline in asset volatility on trend.