• Expectations have so much influence over investors that a slower contraction than anticipated has boosted markets
• They’ve gotten ahead of themselves: there’s little about global conditions to indicate the economy has hit bottom

In financial markets, expectations are crucial. Bad economic news can be treated as good news if the data comes in better than expected.

Last week, the publication of an index of global manufacturing activity, produced jointly by JPMorgan and IHS Markit, showed that output in October contracted for the sixth straight month as the trade war continued to take its toll on the world economy.

However, investors seized on the slower pace of contraction, with the index rising for the third consecutive month, suggesting that the manufacturing downturn may have bottomed out during the summer.Even if the uptick proves to be a false dawn, most investors are now convinced that their fears of a global recession earlier this year were overdone.

The facts speak for themselves. Since October 8, the yield on the benchmark 10-year US Treasury bond has surged 37 basis points to 1.89 per cent, its highest level since early August. More tellingly, the global stock of negative-yielding government and corporate debt, which had ballooned to a record high of US$17 trillion in August, has plunged to US$12.5 trillion. Even Japan’s 10-year bond yield is threatening to turn positive.

Both of these factors have been feeding off each other over the past several weeks, so much so that the “fear of missing out” – known in markets by its acronym “FOMO” – on a powerful rally has taken over as the main driver of sentiment. Never mind that the economic data, particularly in Europe, remains bleak, or that the prospect of a meaningful and durable easing of trade tensions is remote, investors’ belief that the outlook for the global economy has improved has created its own reality.

As JPMorgan rightly observed in a note published earlier this month, asset prices reflect market expectations of a turning point in growth. The issue is “whether markets [are] front-load[ing] the next business cycle to an extreme degree”.

Whether the bulls are jumping the gun will only become clear in the coming months, when the headwinds from the trade war will have either abated or intensified, and when the economic data will either validate or negate the recent improvement in sentiment.