FTSE returns to pre-pandemic levels

European stocks head higher as the global rally continues. Encouraging corporate earnings kept the mood buoyant and helped catapult the FTSE 100 index back to prices last seen before the pandemic.

• Corporate earnings help lift FTSE to pre-pandemic levels
• USD treads water ahead of tomorrow’s inflation data, EUR falls
• Oil falls despite the API reporting a 2m draw on inventories,  EIA data due later

Following on from an upbeat close on Wall Street, European bourses are set to start the session higher on Wednesday. The FTSE, which underperformed its European peers yesterday, closing in the red, is expected to power higher today to levels last seen two years ago, before the pandemic hit.

Corporate earnings are in focus, with a slew of numbers for investors to digest from the likes of Barratt Developments, which saw profits rise, Dunelm which posted a record half-year pre-tax profit and GlaxoSmithKline which posted sales of £1.4 billion.

Inflation

Earnings aside, inflation remains a key concern for the markets. Decade high inflation has fueled bets that major central banks will speed up the pace to policy normalisation. A more hawkish tone from both the Fed and the ECB last week caught the markets off guard.

The ECB has since been back-peddling, with ECB President Christine Lagarde saying that no big tightening measures will be needed because inflation will fall back to 2%. Then yesterday, the head of the French central bank Villeroy said that the market had overacted to the perceived hawkish ECB meeting.

Looking ahead, the economic calendar is quiet today. The BoC’s Governor Macklem is due to speak, in addition to the Fed’s Mester, who could provide further clues over how aggressively the central banks are looking to tighten monetary policy. 

Disney and Uber are due to report in the US session. 

FX 

In the FX market, the US Dollar is holding steady, biding its time ahead of tomorrow’s inflation data. Overnight the USD/JPY hit a one month high as treasury yields rose to 1.97%, the highest level since November 2019. Expectations are building ahead of tomorrow’s US inflation data. Hot inflation, after a strong jobs report could cement a 50-basis points rate hike from the Fed in March. A more hawkish Fed would highlight the central bank divergence with the BoJ, boosting the USD/JPY.

Meanwhile the euro continues to sell off for a third straight day as ECB members cool hawkish expectations. EUR/USD looks set to test support at 1.14.

Oil

Oil prices are moving lower despite API data revealing a larger than expected draw on inventories. The data revealed that inventories dropped by 2 million barrels last week, defying expectations of an increase in stockpiles of 400,000 barrels. EIA stockpile data will be released later.

Instead, oil prices have been easing back from a 7 year high, amid concerns of Iranian oil returning to the market as US – Iran nuclear talks progress, and as tensions between Russia and Ukraine could be cooling, slightly. However, it's also worth noting that technically oil was in overbought territory so a pullback amid profit taking is also a likely cause of the move lower.