Stock markets are continuing to suffer across Europe today as the inflation scare rattles equity investors worried about rising prices affecting their portfolios. The FTSE 100 was down nearly 2.5% at one stage while the index of the top 600 companies in Europe is down 1.7%. Prospects of sustained higher inflation can depress stock prices by lowering the real returns from dividends as interest rates are raised. Gold and oil are being sold too while Bitcoin is trading below $50,000 after it was down nearly 10% overnight after Elon Musk revealed Tesla would no longer be accepting the cryptocurrency as payment for its vehicles.

Rising rates means bond yields go up and the 10-year US Treasury is holding its gains from yesterday trading around 1.70%. This is currently also supporting the dollar with the DXY approaching 91 and the 100-day moving average just above here, which will act as solid resistance.

 

Buy the dip?

Stock market bulls have been euphoric in recent weeks with record high prints in many of the main global market indices made as recently as last week. But there has been a lot of internal rotation going on with the Dow and its breadth of industrial and financial stocks holding up better than the tech-laden Nasdaq. Ultimately, those stocks pegged to the economic cycle and reopening have now priced in much of the recovery, so valuations have certainly become “frothy”.

The bullish trendline from the November low in the Dow comes in around 33,175 and along with the 50-day moving average just above, should offer good support. There is still an abundant amount of liquidity in stock markets generally and any imminent tightening from the Fed seems unlikely.

 

USD/JPY perks up

USD/JPY is closely tied with the yield on the US 10-year Treasury bond and has touched mid-April levels today near to 110. If surging prices continue to push those yields up towards the March highs at 1.77%, then markets will see 110 and the cycle high at 110.955 in due course. The 50-day moving average offers first support to the bulls around 109 which is where the 23.6% Fib level of this year's low to high move resides.

 

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