The great switchover

SOMETIMES the financial markets seem to go in a different direction from the fundamentals. Global economic forecasts for 2016 are still being revised downwards and the rate of defaults on corporate bonds is rising sharply. But since the middle of February, share prices have rallied strongly while the spread (the excess interest rate over government bonds) paid by corporate borrowers has fallen significantly.

The reason for this divergence is that investors are affected not just by news, but by how the news diverges from their expectations. Things may not be great, but they are not as bad as was feared earlier in the year. In February there were widespread worries about the Chinese economy—concerns that the plunging price of oil and other commodities seemed to validate. The latest data suggest the Chinese economy is slowing but not crashing; commodity prices have rebounded. In February the Federal Reserve was also expected to tighten interest rates repeatedly this year; now investors think it will move cautiously (see...

via The Economist: Finance and economics Business Feeds

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