Cautious Optimism Fuels a Small Rally in Risk to Start 2012

Manufacturing data out of Asia provided the base for a small risk rally today, led by PMI data out of China, India and Australia. However, this data might only provide a brief respite for risk assets given the uncertainty surrounding the European debt crisis, and the next 90 days will be critical for banks and sovereigns'' in the region as they attempt to re-finance huge amounts of debt.

Last week''s semi-failure of Italy''s bond auction highlights the difficulties that sovereign nations face. It is not that surprising that Italy struggled to find willing buyers for their debt, when we consider that investors have no real reason to load-up on sovereign debt that could become fairly worthless very quickly.

Tomorrow''s German 10-year bond auction will be watched closely for signs that the market is losing faith in the region''s biggest economy. If investors start to pull out of German bonds then little hope will remain for struggling sovereigns. Nevertheless, we expect that German bonds will retain their safe haven status, and in turn we could see risk assets gain on the back of the auction.

Australia''s manufacturing PMI data spurred a rally in risk assets this morning, however we would advise caution for those looking at these numbers and thinking that manufactures are going to emerge from a global economic slowdown unscathed. Most of the sub-sectors still recorded declines and any significant global economic slowdown will be fed through to Australia''s manufacturing sector through a possible decline in demand for commodities, which makeup a significant part of Australia''s export market.

AUDUSD managed to break through 1.0280 during the session, yet EURUSD could not push above the 1.3000 level. In equities, New Zealand, Japan and Chinese markets were all on holiday today, and the AUS200 is up by around 1.2% at the time of writing.

Futures markets are pointing towards a lower open for most stock market in Europe. Nonetheless, this could change quickly with the release of Swiss and German PMI figures at 19:30 AEST and 20:30 AEST respectively.