Dip in equity markets is short-lived

Heading into the close the FTSE 100 is 10 points higher, having explored fresh intraday highs during the course of the session.

Source: Bloomberg

DAX eyes 12,200

The latest dip in equity markets seems to have lasted barely 24 hours, as ‘Turnaround Tuesday’ kicks in once more. The session started slowly, with poor Chinese manufacturing hobbling the index’s performance at the open, and the apparent weakness in the world’s second-largest economy has contrived to keep mining stocks in the red all day in London.

Nonetheless, signs of improvement in the eurozone, and especially in the vital German engine room, helped to lift sentiment. Mario Draghi’s magic appears to be working, at least for now. Economic data is making for pleasant reading even if the Greek crisis is still to be fully solved. On the continent the Euro Stoxx 50 and CAC40 moved back to their recent highs, while the DAX moved back above 12,000 as it prepared itself for a fresh run at its all-time high beyond 12,200.

Shares in British Airways owner IAG are just a short distance away from doubling since their October lows, sent higher by the prospect of a return to dividend payments and a very undemanding earnings multiple that promises more good news to come.

US price growth 0.2%

US indices tiptoed higher, following the lead set in Europe, although an in-line CPI reading threatened to derail any rally before it had even started. Price growth in the US was a modest 0.2%, although core prices raced ahead with a 0.2% rise compared to expectations of just 0.1%.

When set against the eurozone however, the US is experiencing robust price rises, and this helped the dollar to recover some of the ground lost over the past week in the wake of Janet Yellen’s decision to pull the rug out from underneath dollar bulls. The focus shifts to the US for the rest of the week, but for the most part the forthcoming data are not expected to disrupt the current theme of a Federal Reserve that is in no hurry to raise rates.

Dollar weakness could continue

The US CPI reading did provide a brief blip in gold’s current upward move, but normal service was rapidly resumed, with the yellow metal holding on to the $1190 area as a staging post before its attempt to recover $1200. A few more days of dollar weakness is still the most obvious scenario, which provides time for gold to lift itself further off the lows of last week, with silver following suit.

UK CPI data makes poor reading for GBP/USD

Unsurprisingly GBP/USD has not taken the UK’s CPI reading this morning particularly well. Oddly, last week’s comments by one Bank of England policymaker about a potential cut in UK rates went almost unnoticed, hidden by the Budget excitement, but today’s absence of price growth means that the Bank of England will be forced to retreat yet further from any discussion of a rise in interest rates.

Over the course of a year the BoE has gone from tentative hawkishness, to studied neutrality and then to cautious dovishness. Having had to eat their words in recent months, bank policymakers are likely to be a lot more circumspect in the future.  

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