Realignment

It was the height of summer, 2011. The Arab uprisings and Great East Japan Earthquake had already made for a nervous start to the year. In Europe, new bailout terms for Greece were failing to contain fears of a sovereign credit event, expected by many to trigger catastrophic financial contagion. And then at the end of July, growth figures for the US economy were revised down in the middle of tense budget negotiations that threatened government insolvency.

The result, as we know, was meltdown. The world watched in horror as the perfect storm unfolded under the influence of events on either side of the Atlantic. It was as if the US and Europe were planets that had aligned to exert a baleful influence on the world economy.

Today it is clear that there has been a realignment. The Greek circus limps on and Europe retains the power to terrify. At the same time, however, a consistent stream of positive economic data from the US has laid the spectre of a double dip recession to rest. The planets seem to be pulling in different directions.

Markets yesterday were a case in point. With the latest agreement on Greece delayed, the FTSE 100 index swiftly fell by over 1% in early trading. Relatively little of this loss had been given up by lunchtime. And then at half past one, employment and housing data from the US showed more of an improvement than the consensus was expecting. US index futures spiked up and London began to recover some ground.

On the New York open (2.30 pm GMT) the S&P 500 started out flat. Then at 3 pm, there was more positive data on the US mortgage market and business conditions. American markets began to rise, taking Europe with them. At 4.30 pm the FTSE 100 closed the day pretty much unchanged.

The question seems to be, who will win the tug of war: the US, or Europe? Into the orbit of which planet will we be drawn?

It is hardly worth saying that a cataclysm from the eurozone could upset the apple cart – though with bond yields in peripheral countries way below their November peaks the market is taking the view that this risk has reduced. And if Europe does continue to avoid out-and-out disaster, then at some point it is possible that the background to last year’s crash will be exactly reversed: US growth will be stronger and fears over sovereign debt will recede.

Time, as ever, will tell.