European markets higher, while AUD spikes as inflation drives calls for RBA rate hike

• European markets higher as weak German Gfk reading lifts ECB July cut hopes
• Australian inflation surge lifts expectations of a 2024 hike
• US earnings season ahead, with traders seeking to justify gains

European markets are on the rise in early trade today, feeding off the tech-led rebound seen for US markets. Coming in the wake of a Nvidia selloff that saw the company lose over half a trillion dollars of market cap, yesterday’s 6% rebound for the tech giant helped lift the company back up to the $3 trillion marker. In Europe, the week continues to play out against a backdrop of French political uncertainty, with traders stuck between the cautious approach as Le Pen’s lead widens, and temptation to buy the dip after recent declines. Nonetheless, this morning has seen a focus on the German economy, which continues to flash warning signals after the Gfk consumer climate figure posted its first decline in five-months. Coming in the wake of disappointing Ifo, manufacturing, and service PMI surveys, we are seeing expectations for a July rate cut gradually grow (currently 36%). With ECB Governing Council member Olli Rehn signalling the potential for another two interest rate cuts this year, we saw EURUSD fall back below 1.07 in early trade today.

The Australian dollar pushed sharply higher overnight, following an unexpected rebound in CPI inflation that saw a six-month high of 4%. Despite expectations of a more moderate move higher, the sharp 0.4% rise for headline inflation came thanks to dramatic gains in household electricity costs (6.5%) and automotive fuel (9.3%). While the core inflation metric fell from 4.1% to 4%, the surprisingly strong headline figure has seen a huge swing that now puts a 2024 rate hike as a base case scenario.

Looking ahead, today’s US session sees the release of earnings from Micron Technologies, Levi Strauss and General Mills, as traders gradually warm up for the second quarter earnings season that kicks off with the big banks in just over two-weeks. Equity markets have been driven higher thanks to the incredible 48% gain seen for Nvidia in the month following their May Q1 earnings report. However, with the second quarter earnings season upon us, it is almost time for traders to take stock and seek clarity over whether equity market valuations are currently justified.