Markets are waiting, but it’s not clear what they are waiting for. It may be a combination of factors.  Europe remains constrained by ECB inaction and the threat of the Ukraine.  The US is nervy about low bond yields and the DOW and S&P making new highs.  In Australia we are digesting the new federal budget.
Europe is improving but it’s not shooting the lights out.  Economic growth is only expected to be around 1%.  This is not enough to fix government finances or improve the employment situation – especially when you add in low inflation. We will get a clearer picture on European growth this week, as many countries in the Euro zone release their preliminary GDP numbers.
The Euro responded to the ECB’s lack of action last week by dropping back slightly to $1.37 after nearly touching $1.40.  However the Euro remains strong. The strength of the Euro has surprised the market as expectations since the start of the year have been for the USD to be strong - not the Euro.
The markets are also waiting for the vote in Ukraine on the 25th of May. The Ukraine crisis has been going on since March.  It still has the potential to derail markets if it flares out of control and Russia needs to officially send in forces.
Against this backdrop, demand continues to grow for bonds from countries such as Spain, Portugal and Ireland. 10-year borrowing costs for Ireland are now lower than the UK and US, whilst borrowing costs for Spain are not much more expensive. Investors seem happy to move up the risk curve.
US long bond yields are confusing the market as they remain in a tight trading range - between 2.5% and 2.8%. This compares to the market’s expectation that they would be above 3% by years end.
Some in the market are interpreting the low US yields as a bad sign.  The bond market is not pricing in the same positive growth scenario as equities.
It’s a big week for Australia with the federal budget released. We will be looking for the impact of new taxes and policies on consumer confidence.  Consumer confidence has only recently come back and is still fragile.  Sensibly, the Budget avoids a large fiscal contraction in 2014-15.   Instead it is concentrating its biggest impact in 2016-17; and especially 2017-18 when the economy should be stronger.
Australia is also yet to feel the effects of the slowdown in China with exports to China - especially iron ore - continuing to grow; and providing us with three months of trade surpluses.  The Australian Dollar also continues to defy expectations, rising more than 5% this year.
The stronger employment situation; inflation near the top of the RBA band; and a budget whose affects won’t be felt in force until 2016, limits the RBA’s ability to cut rates further.  We expect them to remain stable for most of the remainder of the year.
Of course all this doesn't seem to help our market, which many analysts believe is fairly valued, especially the banking sector, which has been a big driver of overall market performance.