<strong>JANE FOLEY<br /> RESEARCH DIRECTOR, FOREX.COM<br /></strong>September has begun under a cloud of apprehension, as investors worry that the rallies in the stock markets and also in commodities such as oil&nbsp; may have over-compensated for the improvement in global demand. It would be foolhardy to presume that risks to global economic growth have completely disappeared &ndash; they have not. <br /><br />Nonetheless, most commentators would acknowledge that the economic performance of many countries since the spring has turned out to be better than many of us would have dared think possible just a few months ago. Given this, any corrective phase this autumn should not be too aggressive.&nbsp; <br /><br />The declines in most indices on 1 September contrasted with the day&rsquo;s upbeat economic data. With the notable exception of the poor UK data, purchasing manager surveys (PMIs) for China, the US and the Eurozone all improved, giving weight to the perception that the global recovery should continue through the third quarter and beyond. But the better data doesn&rsquo;t mean that a correction in stocks and commodities is not justified. <br /><br />The S&amp;P 500 is up around 32 per cent from its March low, while the FTSE 100 is up 27 per cent and Brent crude has risen over 49 per cent from February. Brent has now returned to the $67-68/barrel area from a recent high of $75.83, amid fears that a significant rise in prices beyond the $75/barrel level could alone damage the prospects for global recovery. <br /><br />But while the strength of recent rallies easily justifies some corrective activity, what should also be colouring the market&rsquo;s outlook at present is the fact that central banks remain reluctant to give up their cautious tones. <br /><br /><strong>TECHNICAL RECESSION<br /></strong>Despite Australia completely avoiding technical recession and posting a stunning 0.6 per cent quarter-on-quarter upturn in growth in the second quarter, the Reserve Bank of Australia (RBA) last week announced that rates are still appropriate &ndash; a phrase that threw cold water on the market&rsquo;s perception that rates could rise as soon as next month. And in the US, the release of the minutes of the 12 August Federal Open Market Committee (FOMC) acknowledged the economic improvement but the Federal Reserve remained wary about the prospects for household consumption given the rise in joblessness. Similarly, the European Central Bank&rsquo;s (ECB) president, Jean-Claude Trichet, last week warned that the growth path may be bumpy, although he acknowledged that the downturn was coming to an end. The ECB&rsquo;s forecasts continue to outline the risk of a negative growth rate during 2010; the range of forecasts being -0.5 per cent to +0.9 per cent year-on-year. <br /><br />And given that these countries are expected to outpace the UK in terms of economic growth, the tone of the BoE following this week&rsquo;s policy meeting will be laced with caution.&nbsp; <br /><br /><strong>BROAD MONEY<br /></strong>Last week the Bank of England tweaked its monthly money supply release. In an effort to make M4 &ndash; a measure of broad money &ndash; more meaningful, the bank has supplemented the release with data which excludes financial corporations that focus on intermediation such as clearing counterparties.<br />&nbsp;<br />The weakness of this data explains why the series is relevant to the Bank &ndash; while growth in M4 appears to be robust at around 14 per cent quarter-on-quarter in the second quarter, data that excludes the financial intermediates gives a far weaker projection of the money supply (at just 3.3 per cent quarter-on-quarter in the second quarter, from over 10 per cent ahead of the Northern Rock crisis). <br /><br />The series suggests that despite the Bank&rsquo;s huge quantitative easing, inflation pressures and rate hikes remain a long way off. In essence, the money multiplier is still broken. The fact that this year&rsquo;s huge amount of stimulus (both fiscal and monetary) is still failing to produce inflation signals is still a common issue throughout the G10. <br /><br />A slowdown in the rates of job losses in many countries and the fall in money market rates both suggest that the mechanisms that stimulate sustained demand have started to heal. <br /><br />That said, the markets should take heed of the cautious notes still present in the rhetoric of the central banks and there could still be a long way to go before the global economy is on a path of sustainable recovery. Following the strong step up in risk appetite since the spring, investors should be prepared for a possible, moderate correction in risk appetite this autumn.&nbsp; <br />ResearchEMEA@forex.com