GLOBAL equity markets have recovered strongly in recent weeks and the S&P 500 has now reached its highest level since the Lehman collapse in 2007.

A raft of recent encouraging data and central bank initiatives have buoyed markets as the possibility of a euro break-up has receded, while central banks have acted decisively to support flagging economies on both sides of the Atlantic.

The fourth anniversary of the Lehman collapse coincided with a third round of quantitative easing by the US Federal Reserve and it is now hoped that the European Central Bank (ECB) will live up to its promise to “do whatever is necessary” to support the euro by intervening in government bond markets and so lower borrowing costs for Spain and Italy.

Last Wednesday, a German court ratified the European bailout fund which has opened the way for more aggressive intervention by the ECB. As a result, investors have been encouraged to buy into equity markets and retreat from safe havens, which has seen rising yields on German and US debt.

While the present rally seems well underpinned by recent events, investors will begin to focus on global growth and other inconvenient matters such as the US “fiscal cliff” (a combination of the ending of tax breaks and implementation of automatic spending cuts).

After the US election, there is likely to be a showdown over tax and spending no matter who wins, suggesting a US recession in Q1 2013 followed by a recovery in the second half but with little growth for the year as a whole. US equities have been strong performers while European equities have lagged and investors are starting to question relative valuations.

: : Mark Marshall is an investment manager with Charles Stanley & Company