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European Outlook: The global stock market rally run out of steam in Asia overnight and the Nikkei closed with a 1.13% loss, as markets turn cautious ahead of Yellen’s testimony to lawmakers. A strong Yen added to pressure on Japanese bourses, with other Asian indices only slightly in the red. U.S. and U.K. stock futures are also down, however, and while the overall sentiment still seems cautiously optimistic markets seem to be waiting for a clearer trigger to extend gains. Core European yields moved higher and yield curves steepened yesterday, while peripheral long yields declined and the spread over the German benchmark narrowed, at least in the 10-year area. The picture was very different for 2-year yields, which climbed in France, Italy and Spain, where yield curves flattened as the short end underperformed and spreads widened. Today’s very busy calendar starts with German GDP and inflation data at the start of the session, followed by GDP numbers from Italy, Portugal and the Eurozone, as well as inflation data from Switzerland and the U.K.

FX Update:  The dollar is trading at moderately softer levels, despite seeing a flurry of buying just ahead of the London interbank open. USDJPY has retreated to the lower portion of the 113s amid a generally firmer yen today, which has recouped losses sub-113.50 levels as the risk-on vibe of yesterday was replaced by a risk-off one today. The sudden resignation of Trump’s national security advisor Flynn, and a nosedive in Toshiba shares after the conglomerate delayed its earning announcement, soured investor risk appetite. Markets are also being cautious ahead of Fed Yellen’s testimony before the Senate today. Most Asian stock indicies gave up intraday gains and declined into the red, while the Nikkei closed 1.1% for the worse. USDJPY breached both yesterday’s low and its 20-day moving average. Last Friday’s low at 112.88 provides a near-term target. EURUSD recovered above 1.0600 from 1.0591 low, while the dollar has posted an eight-day low versus the Canadian dollar, a two-day low against the Australian dollar, and has seen three-day lows versus sterling.

Germany: The January HICP inflation was confirmed at 1.9% y/y, in line with the preliminary number and up from 1.7% y/y in December. The breakdown confirmed that the rise was to a large extent driven by energy prices. Prices for heating oil rose 42.5% y/y, petrol prices were up 12.8% y/y and excluding mineral oil products, German inflation would have been just 1.3% y/y. So while the German headline HICP rate is pretty much in line with the ECB’s definition of price stability as close to, but below 2%, the numbers back Draghi’s argument that the uptick is due to temporary base effects. And with much of Draghi’s QE program an insurance policy against stability risks, the data won’t stop asset purchases, but the ECB’s critics in Germany will also feel justified as growth is robust.

US: U.S. equities continue to migrate higher into record territory as faith-based algos pile on their buy orders on the shoulders of last week’s “big league” tax cut promises. The WTI crude has turned turtle and eased back below $53 bbl as the ramp up in domestic shale production nips at the heels of 90% compliance with OPEC supply cuts.US markets closed at record highs with Apple being the main driver, i.e. closed at 133.29 which was a rise of 0.89%.

Canada: Trudeau’s opening remarks were constructive in his joint presser with Trump. The PM said much of Canada’s economy depends on U.S. integration, and that the U.S. and Canada will always be essential partners. The free flow of goods and services must be allowed, he said. In a joint statement, the two leaders said “As the process continues for the Keystone XL pipeline, we remain committed to moving forward on energy infrastructure projects that will create jobs while respecting the environment.” Border security is a “top priority.” Equities have moved slightly higher, adding to modest gains. GoC yields remain elevated, with 2 to 3 bp gains across the yield curve relative to Friday’s closing levels. More broadly, risk-on conditions remain supportive of equities and yields.

Main Macro Events Today                     

  • German ZEW – German investor confidence for February will be even more interesting than usual as it should give an indication about the impact of mounting political risks and the growing tensions between the new U.S. administration on sentiment. Expectations are to 15.1 from 16.6 last time.
  • UK PPI & CPI – Inflation data expected to rise in the headline rate to 1.9% y/y after 1.6% y/y in December. That would bring CPI to within 0.1% of the BoE’s target. The central bank reaffirmed in the February edition its quarterly Inflation Report that it expects CPI to top out at 2.8% y/y in the first half of 2018.
  • US Core PPI – January PPI is out today and should reveal a 0.3% headline with a 0.2% increase for the core. This compares to December figures which had the headline at 0.3% and the core at 0.2% as well. Oil prices have been rebounding this winter but the pace if improvement tapered off in January.
  • Fed’s Report and Fed’s Yellen – Fed Chair Yellen goes to Capitol Hill to give her twice-yearly Humphrey-Hawkins testimony to Congress, for the Semiannual Monetary Policy Report before the Senate Banking Committee.

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Andria Pichidi

Market Analyst


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