Government policy levers shift investor mood

It seems the pair of economic defibrillators – generous bond buying and an extension of the near-zero interest rate horizon – applied by governments and central banks are working.

In the case of Europe and the U.S., at least, these measures have strengthened the regional economic pulse and have infused investors with a renewed sense of optimism, according to BMO Harris Private Banking’s latest Market Commentary Outlook.

Read: Vik’s Pick: Slow and steady U.S. hops over Canada

The modest economic improvements in the two regions, combined with anticipation of additional stimulus measures, have bolstered investor confidence and contributed to positive equity market returns, says the report.

“As we near the end of Q3, we have reason to be optimistic that the poor economic results we witnessed in Q2 were the exception rather than the beginning of a new trend,” said Richard Mason, head of investment management at BMO Harris Private Banking. “A critical factor in the coming months will be the outcome of the U.S. election and the impact of the tax and spending debates that will be needed to address the country’s fiscal cliff.”

Improvement in the U.S. housing market, marked by fewer foreclosures, greater than average monthly job creation rate, and expansion of the service sector are some of the other factors that contributed to improving market sentiment.

Read: Has QE3 saved the economy?

The report also takes note of the fact that U.S. stocks have outperformed world equity markets by a wider margin than in the past 14 years, a function of attractive valuations.

Across the pond, the Eurozone leaders are displaying greater commitment to keeping the club intact while finding ways to improve the credit situation and other systemic fixes.

The European Central Bank President Mario Draghi recently unveiled Outright Monetary Transactions, a program in which the ECB will buy the government bonds of the 17 Eurozone countries to help bring down their borrowing rates.

However, Mason cautions that “while constructive work is underway in the Eurozone, establishing a resolution will be a slow process.”

Read: Draghi unveils OMT; markets rejoice

Among emerging markets, the report focuses on China and observes the country’s “policymakers appear committed to stimulating enough growth to engineer a soft landing.”

However, the world’s second-largest economy is not immune to global economic conditions, especially those in Europe, its largest trading partner.

The muted growth in Europe has been weighing on the Chinese economy, and indeed negatively impacting the region. China’s manufacturing activity fell to a nine-month low in August, another sign of weakness in the nation’s economy.

According to a report by China Central Television, a state television broadcaster in mainland China, “The Chinese government set the country’s economic growth rate target at 7.5 per cent this year. This would be the lowest growth since 1990.”

China and other slow-growing Asian economies like Japan and South Korea have responded by utilizing such policy levers as extra spending and lower lending rates to spur growth.

“With a change in Chinese leadership underway, we expect further policy decisions to be made over the coming months in support of economic growth,” said Mason.

Also read:

Chinese imports shrink, economy slows

ECB should supervise all Eurozone banks: Barroso

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How the ECB will ease the crisis

Eurozone should adhere to strict conditions before ECB buys bonds

What’s slowing down Canada?