Global Markets Overview – 1/8/14

Risk finally enters 2014

Europe and the US finally shook off the holiday hangover overnight as a risk rally took shape on strong German employment gains and stellar US trade balance.

Commodities snapped out of a five-day losing streak after having suffered the biggest declines since the November sell-off, as gold eased for the first time.

Bond yields in the PIIGS hit lows not seen since pre the European debt crisis, with Ireland's ten-year yields hitting an eight-year low; Spain's ten-year bonds dropped to levels not seen since December 2009, and Greece's ten-year bonds fell to 7.43%.

To most, this yield will seem awfully high, however if you compare it to the yields Greece had on offer during the height of the crisis - near 44% - this is an amazing turnaround and suggests some stability is returning to the country.

If there was ever a clear sign that the issues of 2011 and 2012 are abating in Europe, the bond yields of the PIIGS are just that. If investors are willing to buy bonds from the likes of Ireland, Spain and Greece for yields well below the crisis levels, they believe the governments of these countries have got their houses in order, that government policy issues are under control and their economies are showing signs of strengthening after the structural heartache of past three years.

All can be seen as signs of risk-on in the developed world and that the Eurozone is returning to a place of growth.

Moving to the other side of the Atlantic, the US trade balance was a standout read, as the trade deficit fell 13% to a four-year low, as oil imports hit a three-year low showing the US is becoming energy independent and is on track to becoming the biggest net exporter of energy in the world as the shale gas revolution ramps up and the oil export hits highs. The two places this news was felt the most were the DOW and USD/CAD.

Having contracted over the past two weeks, the DOW has now rallied back within 0.4% of the all-time closing high and looks like pushing through this mark over the coming days, as employment data start to be release from tonight. Any good news here will drive US equities higher.

The other place the trade balance was most felt was USD/CAD; it is a clear energy risk pair, considering the make-up of Canada's economy, it reached the highest level since November 2009 of $1.078. This is- a clear sign of the US's upswing as an energy exporting nation and a very positive sign for US energy plays.

Similar conclusions could be drawn for AUD/USD after having seen the pair drop into the 88 cent handle overnight. The Australian trade balance yesterday was strong, with iron ore, copper and energy exports all maintaining the strength seen since August last year, while imports declined 1%.

But the strength of the energy numbers from the US trade balance have just added to the buying euphoria surrounding the USD, meaning there is no support at all for the AUD. This will put a smile on Glenn Stevens' face and could make the February RBA board meeting an interesting one considering the weight it has put on a falling AUD.

Ahead of the Australian open

With commodities experiencing such a strong rebound overnight, expectations are for yesterday's carnage in the materials space to reverse. The volumes through the likes of Atlas Iron and Fortescue were well above the 30-day average yesterday, suggesting a change in sentiment. However, there should be a reversal of this move this morning having seen the positive news in the risk environment.

Ahead of the 10:00am AEDT bell we are calling the ASX up 28 points to 5345, back seven points where the ASX started the year.

BHP's ADR is suggesting the stock will lose further ground this morning and this may be the case as investors await the release of China's trade balance on Friday; however I believe it will be swept up on the positive leads from Europe and the US. It should be a green on screen trading day today.

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