Markets start to recover, but will inflation fears resurface?

European markets are on the rise, but the US CPI reading this afternoon will bring the inflation topic back to the table.

• European markets steady themselves after inflation-led declines.

• UK data raises expectations for a strong Q2 rebound.

• Crude gains ground on demand expectations, but how much is priced in?

European markets are on the rise in early trade, with a sense of calm finally falling into place after a dramatic week of declines. While we are seeing some confidence return this morning, the past two days have provided a rude awakening for any bulls sleeping on the idea that inflation expectations will provide a key roadblock to this ongoing bull market. Unfortunately, while today appears to have seen markets finally set aside inflation fears, traders will be somewhat hesitant in anticipation of another bout of selling if the US CPI rate gains ground this afternoon.

A batch of UK data has provided plenty of grounds for optimism, with both growth and production data outperforming as the UK moves towards a period of rapid economic growth. While the Q1 GDP fell into negative territory off the back of lockdown restrictions, the impressive 2.1% March reading highlights the kind of rapid rebound we should be expecting as we move through the year. Meanwhile, both industrial and manufacturing production data brought multi-month highs, with March output growing by the fastest rate since July. From a market perspective, the pound has been relatively unmoved by this latest batch of economic data. Nonetheless, with the FTSE 100 outperforming, and the pound seemingly on the cusp of another push higher, the UK outlook does look relatively favourable going forward.

Energy prices are on the rise this morning, despite the recent pullback as fears over the Colonial pipeline hack subside. Today we are seeing greater confidence over the demand picture for energy, with the IEA noting that the rise in supply expected in the second half of 2021 comes nowhere near their forecast for demand over the period. With Europe and the US expected to gradually loosen restrictions on domestic and international travel, demand for crude products will likely surge to the benefit of prices. Nonetheless, with crude prices currently back at pre-pandemic levels, there are fears that perhaps much of that supply-demand realignment has already been priced in.

Ahead of the open we expect the Dow Jones to open 82 points lower, at 34,187.