The DAX index advanced to a fresh year high on Thursday as a 7% rally in Siemens after strong results, and a slowdown in German inflation fueled appetite in the German big caps.
The Frech CAC40 gained almost 1%.
But futures hint at a bearish open as US stocks failed to keep up with the European optimism on the back of rising option bets that the Federal Reserve (Fed) could hike the rates to 6%.
The 6% bet
US stocks kicked off Thursday session on a positive note, but sentiment rapidly soured as the Fed hawks didn’t let the bulls enjoy gains. The inversion between the US 2 and 10-year yields hit the highest levels since 1980s, as the Fed members’ calls for higher rates finally started kicking in.
Option traders are piling into bets that the US rates could peak at 6%.
Plus, the surprise 50bp hike from Mexico’s Banxico, on the back of unexpected – and unwelcomed inflation jump since the end of last year, also raised worries that the US could experience a similar uptick in inflation, and, may have to raise rates higher.
And the strong US jobs market, the latest recovery in energy and commodity prices on the Chinese reopening optimism, and the sudden jump in second-hand car prices are red flags.
Now if we make a quick detour to China, data released this morning showed that the Chinese consumer price inflation advanced to a 3-month high, but the headline figure came in a bit short of the expectations, while the factory gate prices fell for the 4th straight month.
But the Chinese New Year is always a depressed period in China, so what will happen from now will matter for global inflation and the base-case scenario is that the Chinese reopening will boost inflation in China, and beyond borders.
What now?
The S&P500 fell 0.88% yesterday, and Nasdaq retreated 0.90%. Topsellers will likely remain in charge of the market on the possibility that maybe inflation in the US may have not eased to 6.2% as expected by analysts.
But nothing is clear before next Tuesday’s CPI release, in terms of Fed expectations. For now, there is rising will to believe that the Fed will continue hiking the rates. If inflation numbers don’t show the easing expected, that willpower will get even stronger, and could result in a sharp pullback in the equity rally.
What’s interesting though, is that the hawkish Fed bets don’t translate fully into the US dollar valuation. The US dollar remains under pressure despite the positive pressure on the US yields. And the 50-DMA offers remain particularly solid in the US dollar index. So, the EURUSD remains seated on its own 50-DMA, while the dollar-yen remains offered into its 50-DMA. Traders are seemingly waiting for a signal from inflation data to be sure that sending the dollar back above the 50-DMA is the right decision.
