European stock indices head for a positive open after a strong end on Wall Street last week and strength in Asia.
· Stocks rise on optimism that US peak inflation has passed & as China starts to re-open
· German inflation is expected to rise to a new record high
· Oil rises to a 2 month high ahead of EU vote on banning Russian oil
US stocks posted their best week since November 2020 last week, snapping a seven-week losing run and rising to a three-week high. Meanwhile, the USD fell 1.5% across the week, its second straight week of declines, tracing US treasury yields lower.
Optimism that peak inflation has passed in the US has helped investors rein in their bets for an overly aggressive Federal Reserve. On Friday, core PCE, the Fed’s preferred gauge for inflation, fell to 4.9%, down from 5.2%. Earlier in the month, CPI had dropped from 8.5% to 8.3%. The cooling of Fed bets was also helped by comments from Atlanta Federal Reserve President Raphael Bostic, who suggested that the Fed could pause the rate hiking cycle following 50 basis point hikes in June and July, should data support such a move.
Stocks in Asia moved higher overnight as major Chinese cities started to ease COVID restrictions. Shanghai is set to end its two-month lockdown on Wednesday.
German inflation
Peak inflation may have passed for now in the US. However, Europe is on a different time scale, but that hasn’t debited the market mood this side of the Atlantic. German inflation data will be released today and show that consumer prices rose to 7.6% YoY in May, up from 7.4% and a fresh record high. Even so, the DAX is set to open 0.6% higher today at a 5-week high.
The FTSE, which put in its best performance since March last week, is also pointing to a stronger start, although it is set to lag behind its European peers. Concerns over the health of the UK economy remain after the services PMI dropped significantly last week and amid expectations that the long bank holiday weekend could tip the UK economy into contraction in Q2.
FX
In the FX markets, the selloff in the USD shows no signs of slowing amid holiday-thinned light trade.
EUR/USD is capitalising on the weaker USD, rising above 1.0750 as the ECB – Fed central bank divergence narrowed following hawkish comments from ECB officials last week. Today’s attention is on German inflation data in addition to Eurozone consumer confidence and the EU summit on the Russia – Ukraine crisis.
Oil
Oil prices are rising, reaching a two-month high heading towards the European open as traders wait to see whether the EU can finally approve the proposed ban on Russian oil ahead of a meeting on the sixth round of sanctions against Moscow. Should the deal, which Hungary was holding up, be approved, then the already tight oil market will tighten further.
The vote comes ahead of the OPEC+ meeting later in the week. The oil cartel is expected to dismiss the West’s calls to accelerate additional oil output and stick to the previously agreed plan of 432k bpd extra production in July.
The weaker USD is also helping to buoy oil prices, making the commodity cheaper for those buying with foreign currencies.
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