Global Markets Overview – July 11, 2014

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By Evan Lucas, IG Markets Strategist | July 11, 2014 9:17 AM EST

A man leaves the headquarters of Portuguese bank Banco Espirito Santo (BES) in Lisbon June 23, 2014. A month after Portugal emerged from its international bailout, its lenders are far from the promised land they might have hoped for. Picture taken June 23, 2014. To match Analysis PORTUGAL-BANKS/OUTLOOK REUTERS/Rafael Marchante (PORTUGAL - Tags: POLITICS BUSINESS)
A man leaves the headquarters of Portuguese bank Banco Espirito Santo (BES) in Lisbon June 23, 2014. A month after Portugal emerged from its international bailout, its lenders are far from the promised land they might have hoped for. Picture taken June 23, 2014. To match Analysis PORTUGAL-BANKS/OUTLOOK REUTERS/Rafael Marchante (PORTUGAL - Tags: POLITICS BUSINESS)

Market puts the cart before the horse as 'contagion' flares

Portugal saw one of its largest banks exhibiting signs of financial stress overnight, as Banco Espirito Santo missed a debt repayment.

The Portuguese central bank stated that Banco Espirito Santo is protected, however this was not enough to slow the panic selling.

In situations like this the market will likely act now and ask questions later, seeing it putting the cart before the horse before it really drills down into the detail to see the true state of play. However, considering we currently have record low volatility in the bond and currency markets, and near record low volatility in the equity markets, coupled with record highs in equities, the protection of profits will take priority - hence the cart first.

The question that will come later is; is this an isolated event or is it the first chink in the chain to fire contagion fears. These issues have always been simmering and the data has suggested that normal setting in these economies is still a long way off. However, the fiscal support across the region would suggest support will come quickly, but that is unlikely to quell the rush for the exit.

Currently global markets are watching the US market, and all signs are pointing to a grind higher. Further signs that employment is accelerating, coupled with talk about stronger Q2 earnings and a sustainable economy all lead to positive trends.

The S&P has not seen a 10% correction in over two years and the S&P futures hasn't seen a 5% or more pull back in 111 trading days. The trend continues to suggest a higher market despite the doom and gloom being written. Yes, the market will likely retreat, but on a three month view the trend is suggesting a higher move.

Ahead of the Australian Open

China data will be a major driver of Asian markets over the next two weeks. Q2 GDP, industrial production, fixed asset investment and retail sales are all due early next week.

Having seen further targeted stimulus this week, soft reads in the GDP and industrial production are likely to prompt the market into thinking further measures will be taken to keep the market humming along. Watch the iron ore and copper prices over the coming weeks to gauge the extent of the easing measures.

I am currently calling the Australian market down by 20 points to 5444; as the issue from Europe transfers to Asia, and with little news to drive it further, the daily trend is likely to hold throughout the day.

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A man leaves the headquarters of Portuguese bank Banco Espirito Santo (BES) in Lisbon June 23, 2014. A month after Portugal emerged from its international bailout, its lenders are far from the promised land they might have hoped for. Picture taken June 23, 2014. To match Analysis PORTUGAL-BANKS/OUTLOOK REUTERS/Rafael Marchante (PORTUGAL - Tags: POLITICS BUSINESS)
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