Reality Will Dampen Risk Appetite. By Nicholas Hastings

A combination of an ultra-cautious Federal Reserve and a generous European Central Bank lifted global market sentiment and boosted risk appetite at the end of last week.

However, reality - in the form of continued mixed economic data - will eventually take its toll.

A stark reminder of just how tenuous the global recovery remains and how weak the 'green shoots' will still look months from now came from Japan on Friday. The country registered a 1.1% deflation rate - the worst recorded since its consumer price index was introduced 38 years ago.

As Daragh Maher, deputy head of global foreign exchange strategy at Calyon Credit Agricole in London, said: risk appetite may have returned but there is "nothing tangible by way of data to suggest it will be sustained for long."

The Fed has certainly tried hard to provide reassurance for the global investment community. The statement it published after its Open Market Committee meeting this week may not have been quite as optimistic about global growth as some forecasters had hoped.

However, the U.S. central bank was quick to deny any suggestions that it would rush into some early hike in interest rates.

At the same time, the Fed was careful to also retain its hawkish credentials, outlining Thursday plans for unwinding the various asset-purchase programs that have been used to help U.S. institutions get over the credit crunch.

The research team at The Royal Bank of Scotland in London summed it up well: "This is a fairly clear indication that, although the Fed is not comfortable taking away the punch bowl just yet, it has begun taking incremental steps to notify the markets that the 'extraordinary and exigent' circumstances that precipitated the need for these programs are fading."

With the market now not looking for a hike in U.S. rates until the second quarter of 2010, riskier asset markets are once again looking attractive.

The ECB has also helped to lift optimism that central banks in general are keen to keep liquidity levels high. Its offer of one-year cheap 1% funds to the euro-zone banking community last week is expected to provide a much-needed injection into that moribund economy.

Nevertheless, while risk appetite has improved, it has hardly gone crazy.

In fact, one look at the performance of the euro against the dollar at the end of last week shows just how careful investors remain. Rather than pushing the euro back up towards the top of its recent trading range just over $1.43, investors failed to even get it as far as $1.41 before backing away.

This probably isn't surprising as while recent economic data from the major economies have indicated an upturn, they hardly suggest that the global economy is undergoing a serious bounce.

A reminder of just how slow this recovery process might be could well come next Thursday, when the U.S. is expected to report another sharp decline in non-farm payrolls.

"It will be months before we can determine whether these green shoots mark the start of lasting growth or will wither before they can take root," said Calyon's Maher.

Early Monday, risk appetite is on the wane as equity markets struggle and oil slips amid fears of sluggish demand.

Around 0700 GMT, the euro is worth $1.4007, down from $1.4070 in late New York trade Friday. The pound fetched $1.6430, down from $1.6520, while the dollar was worth Y95.52, up from Y95.20 in late trade Friday.