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Risk assets were mostly stronger in February recovering in some cases the falls posted in January as it became clearer that the continuing, moderate global economic recovery continued to favour quite broad growth in company earnings. This market reassessment has occurred notwithstanding disruption to economic output both sides of the Atlantic from unusually severe winter weather and concern about quite how much policy makers in China might allow economic growth to slide as they tackled issues of excessive credit growth and property price speculation. Markets drew comfort from the confidence of the US Federal Reserve in the US economic recovery and its reassurance that no official interest rate increases would be on the agenda for a long time yet. G20 finance ministers and central bankers also indicated at their meeting in Sydney that they would coordinate policies to achieve annual global economic growth two percentage points stronger than under current national policy settings over the next five years. Most major equity markets rose in February in excess of 4%, ranging from 4.1% gains for the ASX 200 and the German DAX to 4.6% for the British FTSE 100. A notable exception was Japan’s Nikkei, down by 0.5% on concern about the effectiveness of the Government’s policies to boost economic growth.

Credit markets followed a similar trajectory to equity markets through February, losing ground early in the month but then rallying quite strongly through the rest of the month. Major bond markets were little changed through February, holding their January gains even in the face of strongly improving equity markets and comments from the US Federal Reserve that it would likely continue reducing its asset purchase program at each six-weekly policy meeting. US 10 year and 30 year treasury yields finished February at respectively 2.65% and 3.58%, 1 basis point (bp) higher and 2bp lower respectively than at the end of January. The Australian 10 year bond yield rose by 3bp, finishing February at 4.02%.

On the economic data front, US indicators were very mixed with some clearly adversely affected by severe winter weather. Q4 GDP was revised down to 2.4% annualized growth from an initial reading of 3.2%. Employment readings were soft in December and January. Economic readings in China released through February were mixed, with strong January exports and credit growth offset by weak manufacturing PMI surveys. European readings were a touch firmer than expected on balance. In Australia, soft employment and business investment readings again contrasted with strong exports, retail sales and housing data.

Looking ahead, global economic growth looks set to accelerate as the US, Canada and Britain recover from severe winter weather and headwinds to US and European growth from budget cuts become much less pronounced. Signs of some success containing excesses in China also imply less aggressive policy settings and better growth. In Australia, the RBA is likely to leave the very low 2.50% cash rate in place for some time, perhaps even longer than our call of a first rate hike in August, and the softer Australian dollar is also helping the economy to improve. Stronger housing activity and increasingly better retail sales are showing signs of offsetting the impact of declining mining investment.