>Global: The return of risk aversion (SCHRODERS)

• Doubts about sovereign creditworthiness and the economic recovery have led to a horrid performance from equity markets in the second quarter. With government bonds in the US, Japan and Germany rallying, risk aversion has increased sharply.

• We remain confident in our baseline forecast of a modest global recovery but do not see a quick solution to the sovereign crisis. Furthermore, near term cyclical indicators look set to turn down as the boost from the inventory cycle fades and investors are likely to be debating the double dip through the summer.

• However, on our measures markets are already behaving as if we have gone back into recession given the outperformance of the more risk averse areas and equity valuations are looking attractive again. Consequently, we maintain a modest tilt toward risk assets, hedged by holding some high quality bond exposure, gold and by avoiding the Euro.

Eurozone: Will the Eurozone double-dip?
• Weakness in Southern Europe is likely to continue for some time. This is likely to have both a direct impact on aggregate growth along with indirect impacts which include trade channels, financial markets, and the spread of contagion to sovereigns. Will the sovereign debt crisis cause a double dip recession?

• Taking a close look, we think downside risks to wider Eurozone GDP growth are limited. The weakness of the Euro has already boosted export orders, though more export oriented member states are more likely to benefit than the rest. As a result, Eurozone growth is expected to remain positive, but will be more uneven across member states.

To read the full report: ECONOMIC VIEWPOINT