IMF raises forecast for 2010...

The International Monetary Fund raised its forecast for global growth this year to 4.6% in the latest update of its World Economic Outlook report. This is up a tad from its previous 4.25% only in April. Growth in 2011 is maintained at 4.3%.

On the face of it, the upgrade in forecast seems positive and indeed the markets seized that opportunity to trade higher in equities and commodities as risk aversion took a bit of a backseat. This is not surprising given investors have been spooked in recent weeks by a possible growth downturn stemming from fiscal consolidation in Europe and softer data from China.

But beyond the headline upgrade, which the IMF explains that it's because of a stronger than-expected first half, the document highlighted increased risks for the global recovery. In fact, it warned that the road ahead is strewn with obstacles and dangers.

One of the major risks is focused on Europe where fiscal consolidation is likely to retard growth and cautioned that the implementation of cutbacks as well as adjustments to social entitlements could risk endangering the already fragile state of economic affairs in the region.

Furthermore, banks in the euro area remain cautious in lending to each other on fears of the quality and strength of their balance sheets which are saddled with problematic assets from government bond holdings.

This is not much more than what we already know over the past months. We are not complaining that the markets chose to take it positively. Perhaps the fact that it did not downgrade estimates for 2011 even though it had reduced estimates for all advanced economies bar the US is a positive sign.

For now, we would wait eagerly for the results of the European bank stress tests. Overall, we expect the results should be well received by the markets and that should eliminate a source of uncertainty in the markets. But I wouldn't be surprised that some would remain critical of the assumptions and scenarios used for the stress testing.

If that does not turn the sentiment on the banking sector, perhaps we should expect the ECB to consider more desperate measures on quantitative easing or even a rate cut... That is certainly not a market consensus view at this stage but a move that should not be dismissed.