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Double trouble for markets

Tesla, man and machine

In clear signs that market sentiment is deteriorating, two camps have emerged. Some fear that the optimistic growth scenario that is supporting risk assets is overdone in light of new European lockdowns. Others are worried that a strong economic recovery will drive inflation higher, and thereby reduce central bank and government support.

Concerns about the growth outlook seemed to drive overnight trading. High flying, higher growth tech shares fell hard, although energy stocks rose with a bounce in the oil price. However, this support was largely driven by a blockage of the Suez canal. A supertanker was caught by strong desert winds, and jammed sideways, locking up this crucial passageway. The lift in crude prices may prove temporary if the obstruction is cleared quickly.

Both the US dollar and gold rose overnight, in further signs of investors seeking shelter. Bonds rallied for the second night in a row. The Japanese yen moved higher, in contrast to growth exposed commodity currencies. The New Zealand and Australian dollars were among the worst performers, shedding around 1.3%.

Futures indicate a mixed to softer day for Asia Pacific shares, and volumes may again drop below recent averages. There is little local data to drive markets, although tonight brings a read on German consumer confidence and US employment, as well as the third read on fourth quarter GDP. Traders will watch the read on core PCE closely, and any revision from 1.4% of this key inflation indicator may bring a strong market reaction.

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