Global Markets Overview - 1/16/14

World Bank and private banks enter the driving seat

Both Europe and the US reacted positively to the news that the World Bank is raising its global growth forecast for 2014 by 20 basis points to 3.2%. The reaction from the developed world was further driven by where the growth is coming from, with developed nations component upped to 2.2% from 2%. The slight disappointment was that developing nations had their outlook cut slightly to 5.2%.

This is a slight double-edged sword for Australia as two of our top four trading nations fall under this emerging markets category - China and South Korea; in total five emerging nations are in our in the top ten trading partners.

However, the growth in confidence over the past year coupled with increases in housing demand should translate into data showing that wage and economic growth are moving in the right direction (despite the mining slow down here in Australia) and should back the change seen in the forecast from the World Bank.

The leads coming from the US and Europe are strong as the fears from Tuesday around US earnings may have been over-hyped. The news from Bank of America's four quarter numbers suggest the US earnings session is in for a solid beat, as BoA exceeded estimates on both bottom and top line. The main driver behind the beats was credit growth, and as the US' second largest lender this a solid sign that economic improvements seen at the macro level are filtering through to the micro level, as retail clients turn the optimism we hear from the Fed, to Washington to Wall street into spending.

The Beige Book certainly supports this idea as wage growth in eight of the twelve districts surveyed saw solid wage growth and hiring. This suggests that maybe the shock non-farm payrolls release last week was indeed affected by the Artic snap rather than some form of overreaching weakness throughout the US economy.

Ahead of the Australian open

Australia will be front and centre for Asian trade today with the release of our employment data at 11:30am AEDT. The unemployment rate is expected to hold at 5.8%, however it will be the employment change that will be of most interest.

Over 2013, full-time employment suffered and the real effect of this was masked by the rapid growth in part time employment.

However, in October and November full-time employment started to turn, and with 10,000 full-time positions added in November, we would like to see the figure holding as a sign employment is stabilising in Australia; this is positive for the Australian economy which is still growing below trend. A solid read should have a positive lead for the AUD, however we still believe the dollar is weakening in the medium term as the Fed unwinds its stimulus program.

Also on the Australia radar today is the release of Rio's fourth-quarter production numbers. Expectations are for iron ore output of 55.7 million tonnes and approximately 139,000 tonnes of copper. On the production front, iron ore was expected to hit 265 million tonnes in CY13; this would imply a fourth-quarter read of 69.5 million on a 100% basis. With shipments from Port Hedland at record levels over November and December, don't be surprised to see Rio beating expectations here.

Before the 10am bell (AEDT) we are calling the ASX up 20 points to 5265; that is still 85 points from where the ASX started the year. However, the start of production season should help from a bottom-up perspective to hopefully overrule the macro fears from China. We are watching for BHP to snap out of its current malaise and Rio to pop on better-than-expected figures.

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