Andrew Webb: Markets get off to a confident start

So far, so good. Since the beginning of the year, global markets have reacted rather well to bad news. Think back six months from today and an event like the downgrade of France, Austria and the European Financial Stability Fund might have been the catalyst for anxiety and a nervous slide in share prices. So what has changed? Why are investors standing up to the new year’s difficult eurozone news? There are a number of reasons.

The first is that the downgrade was widely expected. S&P had warned that France was at risk of losing its coveted AAA rating so it was no surprise when it came. Once France and Austria had lost their rating, it was inevitable that the European Financial Stability Fund would follow.

The second point is that investors knew what to expect when the downgrade actually occurred; nothing. Thinking back six months again and it was the US being knocked off its triple-A perch. In this case yields actually fell because prices rose. This is precisely the opposite of what one might intuitively expect when an investment technically becomes more risky overnight.

A likely reason for this is that investors rely more on their own assessment of risk now than in the past and so were unwilling to dump Treasury bonds on the basis of a credit rating alone. The same might be true of French and Austrian bonds and a successful auction of European Financial Stability Fund bonds last week is a good early indication.

There are also reassuring economic signals emerging from the US which is giving bullish investors something to get their horns into. Unemployment fell in the US to its lowest point since February 2009. This is not only a sign in itself that the US economy is creating jobs, but means that 200,000 people found new jobs in December which, for a consumer-led economy, increases the chances of the recovery becoming self-sustaining. This data is supported by less-bad forward-looking signals such as the surveys of purchasing managers, which are a good indicator of future economic activity.

Data from China, too, has given investors reasons to be cheerful, even if it is a matter of interpretation. The Chinese economy’s rate of growth slowed in the fourth quarter to an annualised rate of 8.9 per cent; it was 9.1 per cent in the third quarter. Why is it good news that the growth engine of the world economy is slowing? Because a) previously it was growing too fast and creating an unsustainable level of inflation, and b) it appears now not to be slowing too fast. Although investors should be cautious, it appears as though China has pulled off exactly what it set out to do by overcoming inflation but not at the expense of its long-term growth trajectory.

The final point is political. There is good reason to feel as though it has gone quiet in southern Europe over the past few weeks; because it has. The installation of technocratic governments in Greece and Italy has led to a much more businesslike approach to the crisis. There is less macho political grandstanding than before.