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Volatility might be near record lows, but the perceived risks to global growth and profits have risen towards their highest levels this year.
That's at least in terms of the risk premium priced into asset markets in recent weeks as stock indices have sunk towards their year lows while safe-haven US Treasuries have rallied, pulling benchmark yields down close to where they started 2004.
However, the sum of all the market's fears - whether about geopolitics, US presidential elections, economic policy and corporate profits - may be a lot greater than the reality.
"Anecdotally we have heard some people playing up the terrorism risk and the risk of continued Middle East tensions on the oil price, but we don't see much in that," said Mislav Matejka, a global strategist at J.P. Morgan.
"The sell off in shares has more to do with investors positioning themselves for an expected slowdown in growth rather than with any changes in perception on the risk front on the back of the US elections," he said.
Despite a solid second quarter results season, where some 71 percent of S&P 500 firms have beaten market expectations, and the efforts of Fed Chairman Alan Greenspan to play down June's weak US economic data as a blip, investors have taken no chances.
"The way stock markets are behaving, the way they've been ignoring the good earnings news, shows the extent to which a good first half is already in the price and the extent to which investors are worried about future earnings prospects," said Teun Draaisma, a European equity strategist at Morgan Stanley.

Copyright Reuters, 2004

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