Not time to crack open the champagne (Jul 09)

Risk appetite is back. The S&P 500 has climbed over the 1000 mark for the first time this year, corporate bond spreads are continuing to contract, emerging markets are rallying and commodities are joining in the party. But there are three reasons to be cautious. First, a lot of the risk aversion that was embedded in markets has already been eliminated. Second, inflation expectations may be too rosy. And third, the economic recovery will be unusually weak. We think there is plenty of scope for disappointment once the summer party is over. • Money markets are continuingRisk appetite is back. The S&P 500 has climbed over the 1000 mark for the first time this year, corporate bond spreads are continuing to contract, emerging markets are rallying and commodities are joining in the party. But there are three reasons to be cautious. First, a lot of the risk aversion that was embedded in markets has already been eliminated. Second, inflation expectations may be too rosy. And third, the economic recovery will be unusually weak. We think there is plenty of scope for disappointment once the summer party is over. • Money markets are continuing