Four of the biggest issues worrying markets over the past couple of years now appear to be receding, say economists at BMO Capital Markets.
In a report released Friday, BMO suggests that the biggest concerns over the last few years has been: the survival of the euro, the threat of inflation, U.S. budget deficits, and the prospect of a Canadian housing market crash. Each of these worries appears to be fading, it says, adding that this has surely helped boost equity markets this year.
BMO says that while the domestic housing market “looks vulnerable to a moderate setback in the next few years after an incredible run, the trigger for something nastier is not yet apparent.” And, the threat of higher interest rates seems to be steadily retreating, it adds.
Meanwhile, it says that, “The European debt crisis continues to quietly move away from a front-burner issue for financial markets.” While the economy there is still struggling, some European equity markets are rallying to new highs, it notes.
Additionally, recent data suggests inflation is hardly a threat for now. “Overall, it appears that, if anything, the prospect of deflation appears to be the bigger risk for the global economy than a sudden burst of inflation,” it says.
Finally, BMO suggests that the most notable piece of economic news this week was the dramatic cut in U.S. deficit estimates, with this year’s expected gap down by more than $200 billion to $642 billion, and down $445 billion from last year’s $1.087 trillion gap. “While there is no doubt still plenty of work to do in Washington, at least the deficit is fast approaching a sustainable level (say, 3% of GDP),” it says.