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Europe set for lower open after US stocks rout

inflation fears weigh on stocks

It was a day of divergent fortunes yesterday, with European markets reversing some of their early week losses and closing higher on the day, while US markets continued to get pummelled.

As a result of the accelerated sell-off in the US after Europe had closed, we can expect to see European markets give back some of yesterday’s gains and open lower, while markets in Asia have also seen more big falls today.  

The jump in US headline CPI to 4.2%, the biggest rise seen since 2008, was the catalyst for another big day of losses for US stocks, with the Russell 2000 and the Nasdaq once again leading the way. The larger-than-expected rise in headline CPI was largely driven by a 10% rise in the prices of used cars and trucks, but nonetheless, even when base effects are taken into account, was a much bigger jump in prices than most had expected. Nonetheless, the base effects still made a good chunk of yesterday’s big rise, with gasoline and other crude oil derivatives adding a decent percentage to the numbers as well.

This sort of nuance appears to have been overlooked in yesterday’s sell-off in the US, with the S&P 500 posting its worst day since February, while the Dow Jones had its worst day since January, as US 10-year yields closed at a six-week high, over concerns that the US economy might be at risk of overheating.

Federal Reserve vice-chair Richard Clarida expressed some surprise at how big the jump was in yesterday’s inflation numbers, but still insisted that the moves higher in prices were transitory in nature. The rise in yields saw gold prices get thumped, while the US dollar also posted its best day this month. Fears about overheating seem somewhat premature at this time given the disruption wrought by the pandemic and the price disruptions of the past 12 months.  

There is no question we’ve seen some big gains in commodity prices over the past 12 months. Looking at a commodity index, specifically the Refinitiv CRB Index which has risen almost 90% since the lows in April 2020, the gains look spectacular, but they need to be set in the context of an index rebounding from a 25-year low, and which has recovered back to levels last seen in 2015.

While concerns about inflation are continuing to dominate investor concerns, there is unlikely to be any respite with the latest US PPI numbers for April due to be released this afternoon. Factory gate or producer prices tend to be leading indicators for future price rises further down the supply chain, and recent ISM surveys have shown manufacturers and services providers are seeing higher pass-through costs. In March, US final demand PPI came in at 4.2%, the highest level since 2011. Today’s April numbers are expected to see this rise further, to 5.8%, which could well be a leading indicator for another big rise in CPI in May.   

On a more positive note, after the shock of last week’s disappointing non-farm payrolls data, we now have a better idea of why weekly jobless claims are taking so long to come down. Today’s claims are still expected to see a reduction, but it is expected to be modest with 490,000 claims, down from 498,000.

Forex snapshot

EUR/USD – slid back from this week’s highs at 1.2180 level, and could well see further losses towards the 1.2020 area. A move below 1.2020 opens up the prospect of a return to the 1.1920 level.

GBP/USD – slipped back from the 1.4165 area, and could well head back towards the 1.4020 area. This is a key support area which needs to hold to keep upside momentum intact. A fall back below 1.4000 undermines and argues for a move back to 1.3920.   

EUR/GBP – pressure remains to the downside while below 0.8620 and the 50-day MA. A sustained break through the 0.8570 area opens up a move back to the April lows at 0.8478.

USD/JPY – the trend line from the January lows now at 108.15 has continued to support the upside here, with a break above 109.70 arguing for move towards 110.20.  A move below 108.00 opens up the prospect of a move back towards 106.80.

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