Developed country equity and credit markets snapped back quickly after the Federal Reserve tapering wobble a few weeks ago. From the crow’s nest, markets have accepted that Fed policy normalisation will be gradual, become more confident about economic prospects, and put to one side earlier concerns about the risk of deflation. At the coalface, though, things look more nuanced, and suggest that Fed tapering is much less of a risk than rising concern over a ‘fin de siècle’ moment in emerging markets, especially China, which could spark new deflation fears.

Since early May, the top-performing equity markets have been the US and core Europe, putting Japan and southern Europe in the shade. Nearly all developed market indices are outgunning emerging markets, which have lost almost all the gains made from last summer to January, and the continuing slide in commodity prices is undermining countries such as Australia and Brazil.

The tapering announcement, expected after the September meeting of the Fed’s Monetary Policy Committee, has already been well discounted, with US 10-year government bond yields up by nearly 1 percentage point since June. Markets know there is a country mile between tapering and a reversal of quantitative easing, let alone a rise in policy rates. That said, some uncertainty remains about the behavioural consequences for investors, banks and borrowers as the monetary policy regime of the past four years starts to change.