Unconventional Wisdom -- Higher risk, calmer markets :: Macquarie

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Unconventional Wisdom
Higher risk, calmer markets
Event
 The upheaval in European bond markets was worse in Q2 2011 than in Q2
2010. But the reaction in a range of other markets was milder.
Impact
 One of the interesting developments of recent months was the relative calm in
many financial markets. This was despite a huge increase in risk aversion in
European bond markets, tighter monetary policy in key emerging economies
and a rate hike by the European Central Bank.
 A key reason for the better performance in 2011 compared to 2010 is the
policy stance of central banks in the US and Japan. Global liquidity conditions
eased and this provided an offset to the flight from risk in Europe.
 The next step is for these easier liquidity conditions to show up in improved
growth data in the developed economies. Such a result would be far more
important for markets than the end of QE2 in the US.
Analysis
 The panic in the bond markets of Europe was considerably worse in Q2 2011
compared to the first bout of jitters in Q2 2010. Spreads blew out alarmingly
this year and the prospect of a default was treated more seriously compared
to a year ago.