Europe
A spike government bond yields spooked European markets on Tuesday, twitchy about the prospect of a resumption of the steep bond market sell-off seen a month ago.
The drop in bonds came as European consumer prices picked up more than expected in May, increasing the chance the European Central Bank will meet its 2% annual inflation target and curtail its quantitative easing program.
Eurozone consumer price inflation rose by 0.3% year-over-year in May, the first rise in six months. Core CPI rose by 0.9% year-over-year this compares with 1.2% core PCE price inflation in the US. The relatively small differential in core inflation of 0.3% between Europe and the US is not reflected in EUR/USD or bond yields and has started what could be a significant readjustment in EUR/USD and bond yields if sustained.
The first clue that European inflation was building came yesterday after the surprisingly strong inflation from Germany. Even though the gains are largely oil-related, the sharp rise in inflation will give pause for thought for the Bundesbank, which was deeply opposed to quantitative easing to battle deflation from the offset.
The latest European Central Bank meeting is being held on Wednesday.
The FTSE 100 sold off alongside global stock and bond markets dragged lower by tobacco firms but fared better than stock markets in Europe, helped by strong profit growth from Wolseley (LONDON:WOS).
Wolseley Plc (LONDON:WOS) shares jumped after the plumbing supplies company reported a 20% rise in quarterly profits thanks to a strong performance in its United States operations and reiterated its full-year guidance.
Tobacco companies British American Tobacco (LONDON:BATS) and Imperial Tobacco Group (LONDON:IMT) were hugging the bottom of the FTSE after a Canadian court ruling ordering several firms to pay a total of C$15.5bn to smokers in Quebec. The losses were capped by the firms pledge to appeal the rulings but the landmark case is symbolic of a changing tide in courts’ attitude to the cigarette industry.
The reason Imperial Tobacco traded lower, even though it was just Imperial Tobacco Canada that was dealt the penalty is because investors are worried that the result will empower others to pursue similar lawsuits against the industry.
HSBC Holdings Plc (LONDON:HSBA) shares were trading flat after reports the company could announce up to 20,000 job cuts in addition to the 50,000 already announced since CEO Stuart Gulliver promised to restructure the bank when he took the helm.
US
US markets were taken lower at the open by the same jitters that had spread from Europe as US treasuries sold off alongside German bunds and UK gilts.
US Stocks did catch a bounce about an hour into the trading session after a series of disappointing economic data points indicated the Federal Reserve may have to delay hiking interest rates. The New York ISM survey came in at 54 when 58 was expected while factory orders declined -0.4% MoM following a 2.2% gain the prior month.
A rare source of positivity for the US economy was auto sales which included Chrysler having its best May sales in 10 years.
FX
A massive jump in the euro after better than expected inflation data and weak US factory orders sent the US Dollar sharply lower on Tuesday.
The dollar-yen hit 125 for first time since 2002 but dropped back to 124 on the widespread dollar-weakness.
The Aussie dollar traded strongly, up almost 2% against the US dollar after the Reserve Bank of Australia kept rates on hold and maintained a neutral forward guidance with regard to any future policy moves. The lack of easing bias from the RBA in its statement has been taken as hawkishness by the market.
Commodities
Silver was essentially flat with the market left flummoxed after the massive one-day reversal on Monday which signalled a significant shift from strength to weakness in the space of a few hours.
Oil prices moved back towards the highs reached in the middle of May with Brent moving back above $60 per barrel. The strength comes after oil bounced off the lows on Monday helped by dollar weakness.
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