Lower-than-expected Consumer Price Index (CPI) readings from the UK and the US signalled that inflation is cooling off in many key markets, which will give central banks more reasons to stay put.

GBP/USD fell 0.85% from yesterday’s high to re-test an immediate support level at around 1.285 area. The US dollar index rebounded sharply to 97.0 area, reaching its highest level seen in two months. Strengthening of the greenback against the backdrop of dovish Fed and tepid inflation suggests there could be surging demand for dollar-denominated assets, as the US economy is outperforming the rest of the world.

The S&P 500 index climbed up to 2,746 area, a fresh 10-week high. Uptrend is intact but momentum indicators MACD and RSI have shown signs of temporary overbought, and a correction is possible if this week’s US-China trade talk failed to yield satisfactory results for investors. As optimism on an extension of the tariff deadline has been more or less factored in over the past two days, this rendered little protection to the downside should any negative surprises break out after this Friday.

Brent Crude oil prices advanced 1.7% to US$63.7, piercing through a resistance zone at around US$63.0-63.5. Breaking out above this zone could open room for further upside towards the 68.1 area. Political uncertainties in Venezuela, OPEC+’s output cut efforts, and renewed optimism on China demand are positive catalysts, whereas a strengthening USD is putting pressure on oil’s rally.  

China’s Shanghai Composite surged 1.79% yesterday, extending a four-day gain before and after the Lunar New Year. Sectorial rotation seemed to favour small-mid cap stocks this week, with the ChiNext index surging as much as 9% in the last four trading sessions. Lacking positive fundamental updates, this rally is probably driven by the depleting pessimism sentiment and resurging of optimism on fiscal and monetary stimulus. As repeated many times before, strong rally in stock markets are likely to create ‘wealth effect’, which will attract more capital inflow on fear of ‘missing out’. A positive feedback loop in the stock market, if well managed, can spiral into a broader economic recovery as individual investors are feeling ‘wealthier’ and corporates are in a much stronger financial position with their security collaterals becoming more creditworthy.



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