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China’s factory prices jump, negative start tipped for Europe

The mild declines in government bond yields helped stock markets register respectable gains yesterday. 

In the past few weeks, the bond market has often set the tone for equities as whenever yields spike, it tends to get equity traders worried about the possibility of higher inflation.

Also playing into the mix is the optimism connected to the recovery story. Governments are rolling out their respective vaccinations so they are slowly but surely edging towards reopening their economies. Hopes the US $1.9 trillion spending scheme, which includes $1,400 stimulus payments, will be introduced in the near-term helped sentiment too. Policymakers want to get it signed off by President Biden before 14 March so aid programmes can be renewed.

The mood on Wall Street was upbeat but the tech-focused NASDAQ 100 powered ahead as it rallied 4%. The S&P 500 gained a more modest 1.4%. In the past three weeks, tech stocks have underperformed. The prospect of economies easing restrictions and in turn, going back to some form of normality has encouraged dealers to rotate out of tech companies and into traditional industries – natural resources, banking, travel and hospitality.

Gold printed a new nine month low yesterday but it managed to swing around, largely helped by the drop in the US dollar. The greenback fell from its three month high yesterday as the dip in US government bond yields acted as a good excuse to book profits. Silver’s rallied too, while copper ended in the red as there as concerns that China might curtail its credit expansion.                  

Overnight, China’s PPI rate swung from 0.3% in January to 1.7% in February, its highest reading since November 2018. The surge in prices at the factory level adds weight to the argument that higher inflation is in the pipeline as increases in costs at the factory level are likely to be passed on to consumers. The CPI rate in China rose from -0.3% to -0.2%. Even though consumer demand appears to still be weak, it at least is improving. The PPI report is likely to resonate with traders in the West as there have been worries about higher prices recently.  

Stocks in mainland China have rebounded from yesterday’s declines, while the market in Hong Kong is essentially flat as the previous intra-day gains have been handed back. European markets are set for a negative start.           

Lately, there has been a lot of talk about inflation so today’s US CPI report at 1.30pm (UK time) will be in focus. Economists are expecting the February reading to be 1.7%, up from 1.4% in January. The core CPI report strips out volatile components like commodity prices and the update is predicted to hold steady at 1.4%. Last week, Fed boss Jerome Powell, cautioned that we are likely to see inflationary pressure in the months ahead as the labour market improves, and the news pushed up the US 10-year yield, which in turn weighed on equities. The Federal Reserve is operating an extremely loose monetary policy and they are a long way off from looking at tightening their policy. Nonetheless, a jump in inflation is still likely to nudge up yields which will probably dent stocks.

On the topic of central banks, the Bank of Canada (BoC) is predicted to keep rates on hold at 0.25%. Canada is rebounding from the pandemic but the recovery is showing some signs of weakness. The labour reports for December and January showed that -62,800 and -212,800 jobs were lost respectively. In January, the jobless rate rose to 9.4%, a five month high. In light of the weaker labour market, rates are likely to remain at record lows for even longer. The interest rate decision will be announced at 3pm (UK time).                    

The EIA report at 3.30pm (UK time) is predicted to show that US oil stockpiles rose by 816,000 barrels. It would be an enormous fall from the 21.56 million barrels rise posted last week – the colossal build was a result of refining operations falling to 56% of capacity, on account of the big freeze. Gasoline inventories are tipped to be -3.46 million barrels.

EUR/USD – while it holds below the 50-day moving average at 1.2118, the recent bearish move should continue, support might be found at 1.1800. A break above 1.2242 should bring 1.2349 into play.

GBP/USD – since late September it has been in an uptrend, it hit a 34 month high last month. If the positive move continues, it should retest 1.4241. A pullback might find support at 1.3765, the 50-day moving average.   

EUR/GBP – has been in a downtrend since mid-December, last month it dropped to an 11 month low, and further losses might target 0.8400. A rally above 0.8730 should put the 0.8800 area on the radar.   

USD/JPY – has been in an uptrend since early January, yesterday it hit a nine month high. If the positive move continues it could target 109.85. A pullback from here could find support at the 108.00 area or 105.49, the 200-day moving average.    

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