Markets rise on signs of recovery

Filomena Scalise

Filomena Scalise

Published Jan 8, 2014

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London - Global equities and the dollar rose on Wednesday, as solid German economic data pointed to a pick-up in world trade and kept European shares near five-and-a-half year highs.

News on Tuesday that the U.S trade deficit hit a four-year low also bolstered optimism over the global economy and lifted the dollar. Meanwhile, a bumper Irish debt sale confidence that peripheral euro zone countries were on the mend.

The MSCI world equity index, which tracks shares in 45 countries, edged up 0.1 percent on Wednesday to reach its highest level in five-and-a-half years. Japan's Nikkei jumped 1.9 percent to approach a six-year peak.

Data showing that exports from Europe's biggest economy, Germany, rose for a fourth straight month in November provided fresh evidence that the euro zone economy and world trade are recovering from the 2008 financial crisis.

Further signs came from strong demand on Tuesday for Ireland's first debt sale since it exited an international bailout programme. Spanish and Irish government bond yields

hovered near multi-year lows on Wednesday, with Spanish yields reaching four-year lows.

The pan-European FTSEurofirst 300 index was flat, trading near its highest level since mid-2008. Futures on the U.S. stock markets , which have hit record highs, edged back by 0.1 percent.

Shares in Asia excluding Japan rose, and the MSCI Emerging Markets index was up by 0.4 percent.

Norman Boersma, a chief investment officer at Franklin Templeton's Templeton Global Equity Group, said that while there was still a degree of uncertainty over the economic outlook, equities remained an attractive place to put money.

“Overall, we think equities remain cheap relative to other asset classes and an attractive source of yield potential in a low interest-rate environment,” he said.

Old Mutual Global Investors fund manager Francois Zagame also cautioned that the economy needed to strengthen further but was optimistic over the longer-term prospects for equities in 2014.

“We're cautiously optimistic on equities altogether. The data points in the U.S. are OK to good, but it's still sub-trend growth. We've had our doubts over Europe, but it looks as if Europe should muddle through.”

U.S ECONOMY ON THE MEND

The U.S. dollar climbed against the yen after the U.S. trade deficit shrank, and also edged up against the euro.

Signs of a U.S. recovery have reassured some investors that the world's biggest economy can withstand the Federal Reserve's decision to scale its bond-buying programme. That programme drove many investors into equities by curtailing returns on cash and bonds, helping fuel much of last year's stock market rally.

Minutes of the Fed's December meeting are due later on Wednesday. Markets will be hoping for a clear commitment to keeping rates low for a long time to come.

The European Central Bank also meets on Thursday. Analysts and investors doubt it will do more than flag its readiness to act in the future, despite another surprising fall in euro zone inflation.

Data on Tuesday showed inflation in the euro zone eased to just 0.8 percent in December, highlighting the risk of deflation facing ECB head Mario Draghi.

“While we think that the ECB will remain on hold this week, we are expecting a very dovish statement from ECB President Draghi,” economists at ANZ wrote in a note to clients.

The generally positive economic backdrop caused gold to ease for a second session on Wednesday.

Even though most investors remain optimistic on prospects for 2014, the economic recovery still faces threats. One is a possible spike in bond yields as the Fed winds down its bond-buying.

Another is a rise in oil prices amid unrest in the Middle East and Africa. That led to Brent crude's steadying above $107 a barrel after new worries over Libyan supplies. -Reuters

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