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Global equity markets ended higher last week, regaining some of their previous week’s losses, as concerns amongst investors' due to increasing inflation faded. UK markets ended the week on stronger footing, driven by gains in commodity sector stocks. Moreover, the UK’s consumer price index (CPI) advanced more than expected on an annual basis in January. European markets ended the week higher, boosted by upbeat corporate earning results. In economic news, Eurozone’s fourth quarter gross domestic product advanced in line with market expectations on a quarterly basis, indicating that the economy remains on course for stronger growth this year. Additionally, the nation’s seasonally adjusted trade surplus widened more than expected in December, as healthy global economic growth boosted exports from the region. US markets finished in the green in the previous week, amid gains in technology companies and robust corporate earnings reports. On the data front, Michigan consumer sentiment index rose surprisingly in February. Meanwhile, US CPI rose more than expected in January, due to a rise in cost of rent, clothes, gasoline, health care and auto insurance, suggesting that the Federal Reserve (Fed) is on track to hike interest rates three times this year. Asian markets closed higher during the week, mirroring gains in their US counterparts.

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Currency Update

The EUR ended higher against the USD, after data showed that industrial production in the Eurozone advanced more than market expectations on a monthly basis in December. Additionally, the Eurozone economy expanded in line with market expectations in the fourth quarter, thus highlighting the strength in the region’s economic activity. The GBP strenghtened against the USD in the previous week, as increasing confidence that the Bank of England (BoE) will tighten monetary policy at a quicker pace this year boosted the currency. Moreover, UK’s consumer price index rose more than expected in January, suggesting that the BoE might raise its interest rates at a quicker pace over the coming months. The US Dollar ended lower against its key peers last week, as advance retail sales in the US unexpectedly declined in January to post the biggest decline in 11 months, following a slump in sales of motor vehicles and building materials. Further, the industrial production unexpectedly declined on a monthly basis in January, as production for the aerospace, plastics, and food industries dropped.

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Worrying Signals amid Recovering Equity Markets

Most of the global equity markets witnessed a heavy sell off recently, at a time when the major indices were trading at their all-time highs. Nevertheless, most of their losses were recovered in the last week, as risk appetite returned amongst investors. However, for the markets to reach or surpass it's previous peak, there exists few negative worrying factors, such as rising inflation and higher borrowing costs. Recouping of the market has shrugged off increasing inflation and subsequently rise in bond yields, which can damage companies and households having high level of debt. Capability of earnings growth to keep up with the pace of inflation will be key to determine the further direction in the equity markets.

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The Week Ahead

Going ahead this week, investors will keep a close watch on the BoE Governor, Mark Carney’s speech and inflation report hearing. On the data front, manufacturing PMI and services PMI across Europe and US will be on investors radar.

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