Small gains amid higher inflation in Europe

It’s not been the most eventful start to the week and with bank holiday’s littered throughout, that may remain the case.

European equity markets are modestly in the green as risk appetite held up following some positive moves last week. The slight paring back of interest rate expectations appears to be behind the recovery we’ve seen this past week which makes me seriously question its sustainability.

The idea of the economy slowing and fewer rate hikes being warranted just doesn’t scream stock market rally to me. Rather, it fits in a lot more with the bear market rally theory. We’ll soon see what it turns out to be but those hoping it’s all up from here may be in for a nasty surprise.

The inflation data this morning from Germany and Spain should have been another reminder of that but instead, investors appear to have turned a blind eye. There was always likely to be upside risk to this week’s inflation data from the euro area given the sudden urgency to tighten monetary policy from various ECB officials. The most notable being President Lagarde’s blog.

Germany and Spain have both produced just that and I expect the French and eurozone data tomorrow will also be a cause for concern for policymakers. Now that two hikes by the end of the third quarter are almost guaranteed, the question becomes whether the balance can tip in favour of those wanting super-sized moves. Similar to what we’ve seen in the US, Canada and New Zealand.

Are bitcoin rallies vulnerable?
Bitcoin is enjoying a very good start to the week, up more than 6% and jumping back above USD 30,000. I have no doubt some will be excited about this and the prospect of it marking the bottom in the cryptocurrency but that may be a little premature. It’s failed to generate any upside momentum above USD 30,000 on rallies this month and while today’s gains are decent, there’s little evidence yet of that changing.

A break above the recent range high could help change that as the same problem has existed just below USD 30,000 since it recovered from the initial sell-off a few weeks ago. But any rallies could still be vulnerable to higher yields, faster tightening expectations and broader risk aversion. Which will no doubt be at the back of people’s minds.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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