Inflation fears dominate

European stocks are tanking lower after a weak handover from Wall Street. Inflation concerns sent tech stocks tumbling overnight, and the sector has come under pressure in Europe today.

Commodity prices have surged recently amid reopening optimism and infrastructure spending expectations. Copper trades at an all-time high, and base-metal prices are elevated. While the Fed is insisting that rising inflation is transitory, the surge in commodity prices is making investors question the Fed’s stance.

Inflation concerns hit growth stocks in the US, pulling the Nasdaq -2.5% lower. Chinese PPI data overnight added fuel to the fire. Chinese factory-gate inflation data rose at the fastest pace since 2017 as the economy continued to gain momentum after its record-breaking first quarter. The PPI jumped 6.8% year-on-year, ahead of the 6.5% forecast and up from 4.4% in March.

With China and the US, the world’s two largest economies, showing signs of rising inflationary pressures, investors are getting nervous. The overriding fear is that pandemic stimulus combined with reopening economies will spark a sharp drive high in inflation, forcing central banks to take action, tightening policy and potentially slowing down economic recovery.

Inflation concerns will remain front and centre at least until German and US CPI data is released tomorrow. Expectations are for a 2.3% rise in US core consumer prices year-on-year, up from 1.6% in April. A significantly higher read is likely to send tech stocks tumbling again.

Looking ahead, US indices are pointing to further losses, with the tech sector once again taking the hardest hit. Big tech’s blowout earnings numbers from just a few weeks ago have already long since been forgotten, with other market dynamics in play now.

Euro outperforms on upbeat German ZEW sentiment data

The US dollar is edging a few pips lower, paring gains in the previous session. While inflation fears are rising, they are not lifting the greenback.

The pound is consolidating gains after a stellar session on Monday, which saw it book 1% gains versus the greenback and 1.3% gains versus the euro. A combination of local election results, which support political stability, and reopening optimism helped sterling shoot above 1.41. Attention will now turn to BoE Governor Andrew Bailey, who is due to speak this afternoon, followed by UK GDP data tomorrow.

Commodity currencies are performing well as commodity prices continue to reap the benefits of reopening optimism and infrastructure stimulus. The Canadian dollar trades around three-year highs versus the greenback, while the Aussie dollar sits at an 11-week high.

Today, the euro is the top-performing currency in the G10 space, thanks in part to upbeat German ZEW Economic Sentiment data. German investor sentiment skyrocketed in May after unexpectedly falling in April. The closely-watched index jumped to 84 this month, up from 70.7 last month, as the focus shifts to the economy reopening after a lengthy Covid battle.

Oil falls as pipeline disruption seen as temporary

Oil prices are falling as the Colonial Pipeline disruption has all the hallmarks of a short-term glitch. Investors have accepted that the pipeline failure is not likely to be an ongoing issue, with a phased restart expected imminently and full operation restored by the end of the week. The prospect of a return to normality has seen the price of oil slip back to Friday’s levels.

The Covid crisis in India, which shows few signs of easing, is adding to the oil market’s woes. The seven-day average of new daily cases is at a record high, and global health authorities are already warning over the country’s variant, which is of international concern. Pressure continues to mount on Prime Minister Narendra Modi to impose a national lockdown in a bid to contain surging cases.

Looking ahead, crude oil inventories are expected to show a 2.3 million barrel decline following an 8 million barrel drop the week before. OPEC is also expected to release its monthly oil market report today.

Gold rises, but gains capped at 200 DMA

Gold bulls are pausing for breath after a strong rally last week and further gains at the start of this week. Yesterday’s buying has seen some tepid follow-through on Tuesday. The yellow metal remains supported by the risk-off mood in the market and the slightly softer tone surrounding the US dollar.

Inflation concerns are being played out in the equities market. US treasury yields are also starting to move higher, back over the key 1.60%, which could cap gains in gold as the opportunity cost of holding the non-yielding precious metal rises.

Gold has had a steep run higher over the past few weeks. The poor US jobs report cemented expectations of a low for longer Fed. Gold has approached its 200-day moving average and is likely to struggle to move past this level ahead of tomorrow’s US inflation data.