An improving global economy, solid corporate earnings and even easing fears about euro zone debt have been more than enough to rationalize the rising hunger for riskier assets now prevalent on financial markets.

Investors, however, are about to get a reality check.

The coming week features a dollop of economic data from the United States and China, a heating up of the fourth-quarter earnings season, and a meeting of European Union finance ministers to beef up their debt bailout provisions.

Equity markets come into this at multi-year highs, with the MSCI all-country world index at levels last seen in September 2008.

Corporate earnings are robust. Intel Corp, for one, had a rosy outlook for early 2011. Mega U.S. bank JPMorgan also had better-than-expected earnings and saw stability and growth returning to global capital markets to boot.

U.S. and Chinese economic data, meanwhile, have been strong enough to prompt banks such as Morgan Stanley to forecast a 2011 global growth rate above the long-term average, in this case 4.2 percent against around 3.5 percent.

Reality check one should be the EU finance ministers meeting. It follows a series of relatively successful bond auctions in Portugal, Spain and Italy that eased some concern about the ability of debt-strapped peripheral euro zone economies to finance themselves.

Any sign of a consensus at the EU meeting on expanding the European Financial Stability Facility and/or firm proposals to buy back peripheral sovereign debt from secondary markets should add another stabilizing effect.

But the impact of the crisis itself is getting harder to gauge because the appetite for stocks and other higher-yielding assets among investors has translated into most sovereign bonds in developed markets falling out of favor.

This means that any rise in peripheral debt yields is not necessarily tied to fears of default in Greece, Ireland, Portugal and so on. It might just be linked to moves into riskier assets and away from bonds in general.

Such a phenomenon can already be seen by comparing not just the spreads between peripheral bond yields and the German Bund

yield -- which have narrowed in January -- but by the direction both have been moving.

In earlier days (of the crisis), when spreads widened, we saw a substantial decline in German yields. Everybody started to buy Bunds, said Kommer van Tright, a bond manager at Dutch fund firm Robeco.

Toward the end of last year and this year as well, peripheral trouble does not translate in to a demand for Bunds.

Some idea of the current demand for German debt will come on Wednesday with an auction of two-year bonds.


Reality check two is global growth.

The big driver behind the past few month's growing risk appetite has been increasing evidence that the global economy is doing nicely, including in the United States and China.

U.S. recovery has been strong enough to persuade investors that a double dip recession is off the cards, but it still has deep problems.

The division should be on display in the coming week with manufacturing reports and leading indicators likely to show gathering strength, but housing data reminding investors of the deeply embedded weaknesses in the economy.

China releases its latest growth, production and inflation numbers -- all playing on one of the biggest global risks of the year, namely overaggressive Chinese monetary tightening.

ING summed up split prospects in a 2011 outlook for financial markets:

We start the year in a better position than at any time in recent years, and our base case is that economic growth will continue to firm without leading to a pick up in inflation, and that financial markets will continue to normalize. But the list of things that could go wrong is a long one.

One of those is a currency war between China and the United States, which is railing against what it sees as an artificially low yuan exchange rate.

A summit in the coming week between U.S. President Barak Obama and his Chinese counterpart, Hu Jintao, should thus keep forex markets at the least on edge.

The yuan, however, did hit a record high on Friday ahead of the Hu's visit to Washington and China raised bank's reserve requirements by 50 basis points.


Reality check three is whether companies really are in as good a shape as early quarterly reports suggest. Equity investors have been buoyed by the earnings season, which has seen some solid upside surprises.

But it is only really just getting off the ground.

The coming week sees a speed up in U.S. reporting and the first big flush of European company statements.

Goldman Sachs, Morgan Stanley, Bank of America, Citigroup, General Electric, Wells Fargo, Google, Ahold and Delhaize are among them.

Thomson Reuters Proprietary Research estimated that the earnings of the companies of the S&P 500 index will rise on average 31.8 percent for the quarter.

Surprises on top of that will just make investors even more comfortable with risk.