Equity markets – Mubarak gone but upside limited

Equity markets rallied late on Friday on the leave of the Egyptian president Hosni Mubarak. While the news provided an impulse for the bulls, the reaction shouldn’t be carried into this week. First of all, the markets were recovered from the initial negative impact of the turmoil even before the news broke, so the influence was mostly psychological. Secondly, the news doesn’t need to be as good as it looks on the surface. Shifting power to army officials doesn’t need to promise a straight and short way towards democracy. Furthermore, a success of protestants in Egypt may encourage similar moves in other countries, sparking more unrest in the short term (even if leading to a positive change in the long term). At that point it seems that global equities should turn to economic issues this week, most notably to inflation data.  

Inflation data ahead

Even if consumer inflation in China is some 3-4 times higher than in the US, the direction of the CPI figures seems to be similar around the globe – upside. This week investors will focus on CPI releases in China, UK (tomorrow) and US and all those numbers are very important.

The Chinese number, expected at 5,3% will probably be the highest since Jul’08 yet the reception of the inflation figures from China has so far been suspiciously calm. The markets must believe that moderate tightening in China and the base effect (from last year) will be enough to bring down CPI to 3-3,5% by the end of the year. Only if the Chinese figures point to more persistent inflationary pressures, the issue will become (truly) worrying for global markets again.

The UK’s numbers are key for the GBP. Already December’s figure (3,7%) shocked the markets and now there will be an additional effect of higher taxes. With the British economy doing probably better than indicated by the latest GDP report, high inflation may once again fuel a rate-hike speculation.

In the US, the CPI is seen as a complimentary data to the labor market figures. A continued rebound in annual headline and core CPI should support the dollar. The impact on equities will be moderate for as long as the inflation keeps ticking up rather than leaping up.  

USDJPY – yet another chance

The US data may be crucial for the USDJPY where the bulls got another chance last Thursday. The upside potential was opened with a successful test of the resistance line, drew on the recent local highs. The pair might be eyeing even 85,00 but resistances of 83,65 and 84,50 are still on the way. The first one stopped the bulls today and we see a moderate correction. For as long as a mentioned line is not broken (this time serving as a support) the upward scenario remains a base one.   

Events to watch – Chinese figures, BoJ, minutes from RBA

Chinese CPI (consensus 5,3%) will be the key in the package to be releases during the Tuesday’s Asian trade (9 PM ET, 3.00 CET). The package includes also PPI (consensus 6,2%), output (13,6%) and retail sales (19%). The Tuesday’s Asian session also brings the BoJ’s decision (we don’t expect a significant market impact) and the minutes from the RBA. The last one might actually have some impact on the AUD even though the RBA’s chairman made clear last week that no hikes are necessary at the moment. Nevertheless, the Aussie is on the crossroads with upbeat sentiment and still pricey commodities supporting it and local factors (impact of the flood) and appreciating USD posing a threat. In that context, minutes may provide an opportunity for investors to act.    

Przemysław Kwiecień PhD, Chief Economist

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