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But the tail risks appear to be reduced. In Europe, the ECB has said it would do whatever it takes to preserve the euro. Germany openly supports its commitment to the rescue fund and opposes Greece leaving the 17-nation eurozone. Some regulatory body will be formed to oversee the banks in the region and interest rate spreads for Spain and Italy are off their peak, albeit still very wide.

China’s economy has slowed to about a 7.5% growth pace as new leadership prepares to take over. The new regime intends to encourage consumer spending, relying less heavily on exports to sustain the economic expansion. Chances of a hard landing remain, but they appear to have declined. Geopolitical risks in the region, however, have grown as China and Japan dispute territorial issues surrounding the contested group of Senkaku islands in the East China Sea.

The U.S. is urging a diplomatic solution as the repercussions of a breakdown in Chinese-Japanese economic ties would have huge negative implications for the global economy and financial markets. Scores of Japanese-owned factories and stores in China were shuttered as anti-Japan demonstrations erupted in a dozen cities. But, tensions there have diminished and factories are now reopening, although a boycott of Japanese products is threatened. Japanese firms play a big role in the Chinese economy and employment. In Tokyo, many stores and restaurants cater to Chinese tourists. With the release of another weak trade report, the Bank of Japan—similar to many other central banks—is boosting its quantitative easing.

Continuing on the China front, the U.S. announced it was filing a trade case against China at the WTO, accusing the Chinese government of unfairly subsidizing autos and auto parts exports. The risk is retaliatory action. Romney has threatened to label China as a ‘currency manipulator’ on his first day in office, which would seriously impede U.S.-Sino relations. China retorted that much of Romney’s wealth was actually obtained by doing business with Chinese companies before he entered politics. China’s official Xinhua news agency called Romney “foolish and hypocritical” and said such an action would “trigger a catastrophic trade war and damage the already weak global economic recovery.” Middle East tensions are also roiling with the death of the U.S. Ambassador to Libya and some of his colleagues and continued anti-U.S. demonstrations in many Muslim countries. Moreover, the Israeli government has stepped into U.S. election politics with its own pleas for U.S. support of stepped up actions against Iran. This is not only dangerous from a peace perspective, but it would have significant unintended consequences, both political and economic. With this backdrop, no wonder the Canadian dollar is so strong. Canada remains a safe haven and has one of the few rock-solid triple-A bond markets. But the strong loonie has caused a marked deterioration in Canada’s competitiveness and its trade balance.

This mirrors the solid improvement in the U.S. trade position. But Canadian manufacturers can no longer rely on price competition to give them an edge in trade. Better products and services using the most advanced production practices, marketing and technology are key to future success. Moreover, as the U.S. gains greater energy independence, thanks to the surge in shale oil and gas production, the Canadian energy sector must develop the capability to export energy to the rapidly growing emerging economies of the world. With this backdrop, the Federal Reserve decided recently to pull out all the stops and introduce open-ended support for the U.S. economy through additional purchases of mortgage-backed securities, government bonds and any other measures needed for however long it takes to improve substantially the U.S. jobs market. While some disapprove of these measures, suggesting they will be inflationary, the markets appeared to take heart. In addition, the U.S. election is only weeks away and the polls now suggest the incumbent will prevail.

Nothing is certain, of course, but it is likely the U.S. will pass a major budget package in 2013, reducing the chances of a downgrade and enhancing the prospects of stepped up growth next year. For Canada, the government has also suggested that it would temper fiscal drag sufficiently to ensure continued near-potential growth. The output gap is much smaller in Canada and is likely to be closed sometime next year, increasing the prospects of a Bank of Canada tightening action well before the Fed is ready to re-normalize interest rates. To date, the U.S. stock market has meaningfully outperformed the TSX recovering more than 90% of its value lost during the financial crisis and recession. For the TSX, the recovery has been more muted with the weaker performance of our out-sized materials and energy sectors, the underperformance of technology (no Apple), and relatively less buoyant banking sector, albeit from much higher levels. The TSX outperformed the S&P for seven consecutive years ending in 2010.