MORNING BID-A setback for reflation traders

March 24 – A look at the day ahead from Julien Ponthus.

Rising COVID-19 caseloads, lockdowns and travel restrictions — to many people it might feel like little has changed in the past 12 months despite the vaccine rollout.

In financial markets though, we’ve come a long way, with the S&P 500 a whisker from record highs — its 75% increase from March 23 2020 troughs represents the biggest rolling 12-month increase in the index since 1936, Deutsche Bank notes.

And the narrative appears to have subtly switched from being focused on how massive and swift fiscal and monetary stimulus would be, to worries about the anticipated cost of U.S. President Joe Biden’s infrastructure spending plans.

Wall Street’s overnight tumble is dragging markets lower today, hit by the possibility of tax hikes as well as fears of setbacks to the economic rebound. The prospect of a cancelled European summer is weighing on so-called reflation stocks such as airlines, banks, energy.

U.S. Treasury 10-year yields have sunk below 1.6%, continuing their slide from recent one-year highs of 1.75%, as Federal Reserve Chair Jerome Powell again downplayed inflation risks.

European stocks futures are trading lower with the derivative for the DAX, Germany’s blue chip benchmark, down 0.7% as western diplomatic tensions with China are brewing fears of a possible trade war.

Investors wary of the economic health of Europe Inc will be closely watching the publication of euro zone PMIs this morning and later on U.S. manufacturing data.

On currency markets, the dollar index is closing in its four-month top of 92.506 while the euro has retreated to where it stood in November, trading below $1.185.

Key developments that should provide more direction to markets on Wednesday:

-Japan’s factory activity gathered pace in March, Jibun Bank’s flash PMI showed.

-British consumer price inflation unexpectedly fell to 0.4% in February from 0.7%

–Flash PMIs for France, Germany, UK and the euro zone

–Fed speakers: Chair Jerome Powell, New York President John

Williams; San Francisco Fed President Mary Daly, Chicago Fed President Charles Evans

–Central bank meeting in Czech Republic, Iceland meeting

–German Bund auction

–US auctions 5-yr notes

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