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Reflation trading returns on soothing inflation data

Tesla, man and machine

Bonds and stocks rallied together after China and US inflation reads came in broadly in line with forecasts. Both countries saw an increase in inflation in February, as predicted. Traders feared the risk of an explosion in prices, and the removal of that risk saw investor enthusiasm return.

The share market moves favoured sectors most exposed to the post-Covid re-opening of economies. The Dow Jones Industrial Average once again outperformed the broader S&P 500 index, and the tech heavy Nasdaq was flat. Boeing shares led the way with a 14.8% leap, and industrial and materials stocks were most popular. European shares also rallied, with the exception of the UK.

Weekly crude oil data added to the picture of economic recovery. US crude inventories grew by 13.8 million barrels, but a drawdown of 11.9 million barrels in gasoline stocks spoke to greater demand, and traders attributed the crude build to refining delays and shale drillers responding to higher prices and the Texas cold snap

The US dollar eased lower. Commodity currencies regained favour, and the Australian dollar is now back above 77.5 US cents. Precious metals responded to the more benign inflation and interest rate environment, and gold prices rose back above US $1,700 an ounce. Cryptocurrencies joined the party with a better than 4% gain in CMC’s All Crypto Index.

Asia Pacific futures point to opening gains across the region. Japanese corporate price data is due later this morning, and may have a greater influence than usual given the current sensitivity to the inflation outlook. The Euro is in focus ahead of tonight’s European Central Bank meeting. No change is expected in interest rate settings, but there is speculation that the central bank will further expand its bond buying operations. This could bring a weaker Euro and additional share market gains.

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