s expected, equity markets rebounded from their lows, but continue to face challenges ahead. In short-term oversold conditions, many market participants stand ready to pounce on a piece of good news that can fire up optimism. The prospects for the market would be worrisome, indeed, if positive factors failed to generate any enthusiasm. If the overall tendency is to sell on good news, this would be an indication that there is little support to prevent bigger downward moves.

Such is not the case presently. While risk appetite has diminished from earlier somewhat euphoric levels, people haven?t lost it entirely either.

They are more cautious but not unwilling to indulge in a bit of risk. As always, there is a relationship between return and risk ? greater returns are generally associated with the assumption of additional risk.

Emerging market equities have bounded back from their earlier lows, and cyclical sectors have recouped some of their losses. Hard-hit cyclicals have been at the forefront of the recent rally. Industrials, materials and technology sectors have shown some short-term resilience. As for energy, which is a sort of defensive cyclical, it is still being supported by oil prices that have bubbled up again.

Actually, this business cycle has been somewhat unusual in term of sector rotation. Many people had expected the cyclicals to start weakening in the fourth quarter of last year, which broadly didn?t happen. Partly, this is the result of structural problems in many defensive sectors, related to weak pricing power, lack of innovation, regulatory issues and intense competition. We only need mention the pharmaceutical sector, which continues to face a number of challenges.

In addition, technology tends to benefit from investors? hopes for exceptional growth prospects, while commodities have been driven by the China story. Hence the reluctance among investors to overweight defensive sectors aggressively, despite warning signals about a turn in the business cycle.

Leading indicators are still pointing to a loss in momentum for the US economy. At the same time, inventories are rising at a fast clip.

Either firms are anticipating a pickup in sales or there has been unanticipated inventory build-up and a need to slow down production and de-stock. Meanwhile, interest rates are on the rise and consumer confidence is wobbly.

The next few months will be very important in determining the fortunes of the global economy.

In the past, growth in both China and the US has shown a greater degree of resilience than most people had initially expected.

And, of course, how well they continue to do will have an important influence on prospects for the rest of the world. It could happen that they may surprise on the upside, but the balance of positive and negative factors argues for more downside than upside risks.

The Fed is trying to implement a careful strategy of heading off inflationary pressures without squeezing growth unduly. The intention is to rebalance growth from consumption spending to investment expenditures, without overdoing it in terms of hurting consumers? confidence and willingness to spend, or diminishing corporate profitability.

As for China, the data ? which is of poor quality ? is pointing to continued robust growth. But, with inflation on the rise, some tapping on the brakes by the authorities is likely. And, let?s just mention that a slowdown in consumption spending in the United States will also have an impact on Chinese exports.

It appears that Chinese authorities have another issue at the back of their minds.

The economy is restructuring fast and there is a need to absorb large numbers of workers into the labour force, with redeployment from low to high productivity employment.

A rapid growth rate facilitates this task; otherwise the government may face social and political trouble.

So they have been willing to tolerate a measure of overheating in the economy and a rise in inflation.

It is an open question whether they have become particularly adept at fine tuning growth, via policy measures, so that they can pull the levers just in time, without causing an abrupt change in the economy?s speed.

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