Europe cautiously higher, FTSE underperforms, ECB to buy more bonds

European bourses are trading broadly higher on Thursday following a solid handover from Wall Street, which saw the Dow strike a record high as inflation fears and bond yields eased.

There were several key risk events in the US session yesterday and contrary to concerns, all proved supportive of risk sentiment and equity demand.  US core inflation rose just 0.1% MoM in February, below expectations, while core CPI rose 1.3% on an annual basis, also falling short of forecasts. The data put to rest (at least for now) runaway inflation expectations, which had been mounting.

The US 10-year bond auction could have also been a potential pitfall given the pace at which US treasury yields have risen recently. However, the auction drew sufficient demand to push yields lower, back to 1.51%, well down from Monday’s yearly high of 1.61%.

The ECB announced that it would step up the purchase of eurobonds. This triggered a rally in bond purchases and sent eurozone yields lower. The euro’s reaction to the ECB move was muted.

Finally, the House of Representatives passed the largest fiscal stimulus package in US history. The USD1.9 trillion Covid support package will see American’s receive 1,400 dollar stimulus checks within days and 300 dollar unemployment benefits extended.

Given the sheer size of the bill and the American public’s willingness to spend (retail sales surged after the previous check), it’s highly likely that the US consumer will help the economy on its way to a faster recovery. While bond yields and inflation concerns have eased today there is little doubt that they will remain on the market’s radar.

European bourses are on the front foot, except for the FTSE, which once again lags its peers. The heavyweight banking sector is under pressure as falling yields act as a drag, overshadowing the miners, who are tracing commodity prices higher.

The US dollar is edging lower versus its major peers on Thursday after CPI data on Wednesday calmed runaway inflation fears and the 10-year bond auction drew enough support to push yields lower.

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