GLOBAL MARKETS-Shares and dollar rise on further signs of economic recovery

Wed Jan 8, 2014 4:47am EST

* European shares near 5-1/2 year highs

* Strong U.S. trade data boosts dollar

* Peripheral euro zone debt in demand

* Gold falls while Libya unrest lifts Brent crude

By Sudip Kar-Gupta

LONDON, Jan 8 (Reuters) - Global equity markets and the dollar rose on Wednesday, with solid German export data pushing European shares to near their highest levels since mid-2008.

News on Tuesday that the U.S. trade deficit was at a four-year low has also bolstered optimism that the global economic outlook is improving and lifted the dollar, while a bumper Irish debt sale has boosted confidence in euro zone peripheral debt.

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 and 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 added to signs that the euro zone economy and world trade are picking up.

That helped the pan-European FTSEurofirst 300 index creep up 0.1 percent to close in on its highest level since mid-2008.

The U.S. trade data has given markets some reassurance that the Federal Reserve's decision to taper its asset buying from this month was justified by fundamentals. Minutes of the Fed's December meeting are due later on Wednesday and markets will be hoping for a clear commitment to keeping rates low for a long time to come.

Massive stimulus by major central banks has driven investors to equities by denting returns on cash and bonds.

While the Fed is starting to trim back its stimulus, Francois Savary, chief investment officer at Swiss bank Reyl, felt investors should still stick with stocks over other asset classes and said companies should report higher earnings per share (EPS) this year as the economic backdrop improves.

"Equities remains the asset of choice. With the kind of recovery that is materialising, and the numbers that are supportive coming out of the U.S., there should be the ability for EPS to grow," said Savary.

DOLLAR RISES

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

Bumper demand on Tuesday for Ireland's first debt sale since the country exited its EU/IMF bailout fuelled interest in debt issued by the peripheral nations that investors have been wary of investing in since the euro zone debt crisis erupted in 2010. Spanish and Irish government bond yields hovered near multi-year lows on Wednesday.

The European Central Bank (ECB) meets on Thursday for the first time in 2014, but analysts and investors expect it will do no more than flag its readiness to act in the future despite yet another surprise 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.

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

Shares in Asia ex-Japan rose and the MSCI Emerging Markets index was up 0.3 percent.

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

Yet while the majority of investors remain optimistic on prospects for 2014, the economic recovery still faces risks from factors such as a possible spike in bond yields as the U.S. Federal Reserve prepares to scale back its economic stimulus programme of quantitative easing (QE).

Another risk is a rise in the oil price from civil unrest in the Middle East and Africa, and Brent crude rose towards $108 a barrel on Wednesday after new worries over Libyan supplies.

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