With their sights set clearly on a loss of recovery momentum underlying the global economy, equity markets look set for more profit-taking following the latest flash reading on China's Manufacturing Purchasing Managers' Survey. This showed that the economy is continuing to slow. China's PMI was also followed this morning by the eurozone's manufacturing and service sector purchasing managers' surveys and both of these disappointed. So the bond markets start the week with little need for a lead on where to go next.

Bond markets have done well to get where they have but they know from April's FOMC minutes that the Fed has now agreed an outline of how it will implement its eventual exit strategy. They know too that QE2 will end in June. And, with the exception of Japan, they know that inflation is not only above target for the major central banks but also heading firmly upwards. Surely, none of this is good for them!

That is, unless, of course, the attempted reflation of aggregate demand is doomed to end in failure. But this is unlikely and it helps to look at what may be possibly the most persuasive case in support of the outlook for a sustainable expansion.

David Fuller's view These are valid points but there are two others that loom as more important in my own assessment.

The first is crude oil which really is a 'game changer'. The rise from $80 to over $127 for Brent (weekly & daily) and from $80 to over $115 for WTI (weekly & daily) is more responsible for the somewhat slower GDP growth and lower corporate profits estimates than any other single factor. We saw important downward breaks in early May but I will remain cautious while Brent is above $100 and WTI above $90.

The second is food prices which became a problem following last year's poor crop yields and remain a real concern today. Corn (weekly & daily), for instance, has doubled since this time last year. Food price inflation in poorer countries is causing hardship, contributing to social unrest. Unfortunately, it will take time and improved weather conditions in the world's main agricultural regions to alleviate this problem.