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Europe lower amid another inflation record

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By Craig Erlam

European stock markets are a little lower on Tuesday, handing back Monday’s gains to trade relatively flat on the week.

It’s not surprising that we’ve seen a reversal of previous day’s moves considering the inflation data we’ve had from the bloc. The data from Germany and Spain meant the risks were heavily tilted to the upside and that’s how it materialised. ​ Yields across the euro area are higher again Tuesday as investors continue to price in a more aggressive pace of tightening.

The ECB has already accepted that it will need to start raising rates earlier than hoped and has explicitly laid out a timetable for doing so.

But as ever, markets are anticipating more from the central bank, with at least 100 basis points of rate hikes priced in for this year. Tuesday’s data will only reinforce that view with the flash HICP reading hitting a record high of 8.1%, while the core reached 3.8%.

And that’s before the latest moves in energy markets are factored in which have been exacerbated by the EU ban on Russian oil imports.

The announcement is relatively watered down as has been widely reported in recent weeks in order to get all members on board, most notably Hungary, but it is just another bullish factor in the oil market and a further headache for the ECB.

Oil jumps as Shanghai reopens

The price of a barrel of Brent crude hit $120 earlier in the day on the back of the EU deal, as well as the continued reopening of Shanghai and better than expected Chinese PMIs. The gradual phasing in of the deal, along with the exemptions included, prevented the price from rising much higher, but ultimately it further tightens a market that’s already undersupplied.

The reopenings in China are another major bullish factor for crude prices, for obvious reasons.

While the manufacturing and non-manufacturing PMIs were both still contractionary, they were also much better than expected and a significant improvement on April. The lifting of restrictions will see these improve further which will be another upside risk for oil prices.

Gold slips as yields rise

Gold remains choppy around $1,850 and a little lower on the day, despite the risk-averse trade we’re seeing in Europe and ahead of the open on Wall Street.

The dollar is up around 0.3%, mirroring gold’s declines as US yields have crept higher once more. The gold rally was and remains vulnerable to yields heading north again after a period of respite.

A bottom in bitcoin?

Bitcoin made some interesting moves early in the week; first making significant gains on Monday and then breaking above $32,000 for the first time in almost three weeks when it broke below $30,000.

At the time, this was an extremely worrying development for bitcoin, but since then it has stabilised around $30,000 and has been very choppy. Price action this week will have many asking whether the cryptocurrency has finally bottomed.

 

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.