Optimism evaporates

Over the past three months, financial market participants have shifted their attention from hopes of global economic recovery to concerns about Europe. Sentiment improved substantially after the ECB's longer-term refinancing operations. And hopes of a steady economic recovery were raised by positive US economic news and resilient growth in emerging markets, lifting equity and commodity markets. Credit spreads tightened significantly for banks and selected euro area sovereigns, and capital inflows to emerging markets surged.

But by late May, optimism had given way to doubts about European economic growth, the financial health of euro area sovereigns and banks, the impact of fiscal consolidation on growth, and political stability inside the euro area. Together with signs of greater fragility in US and Chinese growth, all this unsettled investors and stoked global financial market volatility.