Europe and Britain
The disparity between financial markets' exuberance and Europe's poor economic performance has some analysts worrying about an "expectations bubble". Despite gloomy economic performance, financial market reports could make you think that business was booming. For example, the Frankfurt DAX has gained about 20 percent since year-end and is up about 59 percent after hitting its nadir in March. The Paris CAC is up 8 percent on the year and the London FTSE-100 index is up 6 percent.

But economic data offer another picture with France, Italy, Germany and the Netherlands all in recession and Britain growth slowing. Analysts expect EMU GDP, to be released Sept. 9, to be in negative territory for the second quarter. But market participants are looking forward to next year, when growth should return to European economies. Somewhere along the line, economic data will have to provide the fundamentals to underpin market performance. European equity markets have stormed to their highest levels for the year as sentiment has improved, helped by interim results from the corporate sector that have exceeded expectations. But now solid data such as industrial output figures are needed to underpin the sharp rise in expectations.

Asia
Shares of exporters led the way higher last week after reports showed that Japanese industrial production expanded and the U.S. economy grew at a faster pace than initially reported. The Topix completed its fifth month of gains, the index's longest winning streak since the start of Japan's 14-year economic slump. The Topix was up 6.7 percent in August, the fifth monthly advance in a row and the longest positive run since the period ended January 1989. The Nikkei jumped 8.3 percent in August, its biggest monthly gain since June 1999. Both the Topix and Nikkei recorded their long-term highs in December 1989 and have lost about two-thirds of their value since as the economy has struggled through three recessions. The Hong Kong Hang Seng, South Korean Kospi, Singapore Straits Times and Australian All Ordinaries have also gained for five consecutive months.

In recent weeks, foreign investors have bought an estimated ¥3,900 billion worth of Japanese stocks, lured by healthy earnings growth and improving economic data. However, domestic institutions have remained conspicuous by their absence, barely participating in the rally. In part this reflects handicaps that hobble the Japanese. Since most domestic institutions can only change allocations at a slow, inflexible pace, they often miss out on trading opportunities. But foreigners would be careless to entirely ignore local skeptics. Recent real GDP data have been helped by deflation - meaning that in nominal terms, the economy remains flat. Moreover, a key reason for caution among Japanese investors is that they have been burnt before!

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