European bourses hit record highs, EZ Q1 GDP better than feared

European stocks have risen to fresh all-time highs on Tuesday, boosted by travel stocks, real estate, and an unexpected upward revision to the Eurozone's first-quarter GDP. However, an unexpected decline in German industrial production and mixed ZEW economic sentiment data is keeping the upside capped. 

Economic growth in the Eurozone has been upwardly revised quite significantly. The quarter-on-quarter contraction was recorded at -0.3% in the first three months of the year, up from -0.6% initially forecast. On an annual basis, the economy contracted -1.3%, an improvement on the -1.8% previous reading.

After a better-than-expected first quarter, combined with easing pandemic restrictions, improving vaccine numbers, and an upbeat outlook for the coming months, there is a good chance that European bourses could continue pressing higher to fresh record levels.

There are still some pockets of uncertainty, however. Data showed German industrial production fell by 1% MoM in April, down from 2.2% in March and below the expected 0.5% increase. With shortages in semiconductors, timber, and other intermediate goods, supply bottlenecks are starting to hamper recovery in the Eurozone's largest economy. The big question is, how long will these supply constraints continue? These figures currently suggest the German economy will be heavily dependent on household spending to support the recovery.

ZEW's economic sentiment also unexpectedly fell to 79.8 in June, down from 84.4 in May and short of the 86 level forecast.

All eyes will now turn towards the European Central Bank meeting on Thursday. The ECB is expected to retain its dovish stance. Governor Christine Lagarde recently said it is too soon to consider tapering support. Even so, investors will be listening closely for any clues as to when tapering discussions could begin.

Looking ahead to the US open, futures are edging higher after an indecisive session on Monday. Tech stocks rose, shrugging off the G7 minimum global tax deal, which could impact the likes of Amazon. Data-wise, the US balance of trade is due. However, trading could well remain cautious and subdued ahead of Thursday's CPI inflation release.

FX – USD rises, GBP slips on COVID, Brexit

The US dollar is pushing higher, recouping losses from the previous session, although trading remained subdued ahead of Thursday's inflation print. The US CPI print is more in focus this month, given the shock 4.2% reading for April. And following the weaker-than-expected non-farm payrolls on Friday, the markets have taken some pressure off the Fed to rein in its ultra-easy monetary policy. That said, the markets aren't entirely convinced, and another elevated CPI print could increase bets of a sooner move by the Fed substantially.

The pound is underperforming its major peers as doubts remain over the 21 June "Freedom Day". The planned final easing of pandemic restrictions could now be pushed back by two weeks as Covid cases continue to rise. The death toll remains extremely low. However, there is a time lag between the increase in cases and the rise in hospitalizations and deaths. 

Brexit concerns are also weighing on the pound as talks between the EU and the UK kick off today over the Northern Ireland protocol, an area of the Brexit divorce deal that continues to be problematic. 

Oil falls, but uptrend remains

Oil is heading lower for a second straight session as investors question the strength of the demand outlook. Data yesterday revealed that Chinese oil imports declined by 14.6% in May compared to a year earlier, representing a five-month low. The unexpectedly low import data confirms weakness in the Asian market.

Despite the pullback in the price, the longer-term bull trend remains intact, and the technical picture is upbeat for now. Expectations of strong global demand in the second half of the year have helped oil prices surge more than 40% so far in 2021. OPEC+ has also supported prices this year by extending production cuts. 

OPEC+ reiterated its intention to add a combined two million barrels per day from July. However, their next move remains a mystery because the group has not commented on what will happen after July so far. It appears that OPEC+ will stay in control, with US oil producers still practicing restraint after the pandemic blow. 

Looking ahead, API crude stockpile data will be in focus later today after a larger-than-expected draw in the previous week. 

Gold eases after a two-day rally

Gold prices are stalling after a strong two-day rally, which saw the precious metal gain 1.5% across Friday and Monday. Follow-through buying from Friday's Goldilocks jobs report boosted the precious metal to USD1,900 overnight. Little has changed for gold in terms of fundamental drivers on Tuesday. Inflation and the Fed's next move continue to be the key drivers for the precious metal. 

US CPI is due on Thursday and is unquestionably the central focus for gold this week, so much so that the precious metal is likely to remain relatively range-bound between USD1,880-USD1,900 ahead of the release.