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Prospects Daily: Equities reach new highs…German IP momentum builds…China returns to trade surplus

Financial MarketsGlobal stock markets continued to advance on Wednesday, with European and Japanese shares rising to five-year highs, on the back of robust China trade data and unexpected rise in Germany’s March industrial production. Developing-country’s shares also rose, with the benchmark MSCI index rising to a two-month high. Meanwhile, U.S. equities opened slightly lower amid profit-taking among investors after a four-day rally which took both S&P and Dow indexes to fresh highs on Tuesday.

U.S Treasury 10-year yields rose to 1.77% in early trading, the highest level in nearly four weeks, in reaction to positive economic data from China and Germany. While U.S. benchmark yields has increased from year-to-date low of 1.61% reached last week amid better-than-expected U.S. job data last Friday, they remained somewhat little changed from a month before, as investors’ concerns lingered over the global economic outlook and the fiscal situation in Europe.

German government bonds gained for the first time in four days after the country’s new 5-year bond auction met with strong demand. Germany’s 10-year yield fell to 1.28% after climbing to nearly one-month high of 1.31% yesterday. Italian and Portuguese bonds also advanced with their 10-year yields dropping 3 and 4 basis points, respectively.

High-income EconomiesGermany’s industrial output increased in March by 1.2% (m/m sa) after a 0.6% gain in February, led by gains in all of the major industrial sub-groups. For the quarter, output was up 0.8% (q/q saar) after contracting by 10.0% in Q4 last year. The unexpectedly strong outturn – sentiment surveys suggested deteriorating business conditions over the period – along with growth in factory orders, suggests that the economy is recovering better than initially anticipated.

Poland's central bank cut its interest rates by 25 basis points to a record low of 3%, amid sluggish growth, reflecting weak Eurozone export demand, and slowing inflation. 

New Zealand’s central bank announced higher bank capital requirements to guard against financial stability risks on concerns of a housing boom. The central bank has been reluctant to raise its benchmark rate, which has been at a record low of 2.5% for two years, on fears of adding to currency appreciation pressures. The New Zealand dollar has risen almost 50% against the US dollar since end-2008 on heavy inflows of capital from yield-hungry foreign investors, forcing the central bank to intervene in FX markets last month, the first such move since 2007, to halt the rise of the currency.

Developing Economies…East Asia and the Pacific: China’s imports rose by 16.8% (y/y) in April, up from a 14.1% increase in March driven by strong demand for commodities. Exports increased by14.7% (y/y), speeding up from a 10% pace in March which left China with an $18.2bn surplus for the month. However, export numbers have come under closer scrutiny as evidence is emerging that exporters are inflating their sales in order to evade capital controls and bring cash from overseas back into China.

Europe and Central Asia: Turkey’s industrial production slowed to 1.4% (y/y) in April, down from 4.4% in February. Manufacturing and electricity production contributed positively while mining was down on y/y basis.

Latin America and the Caribbean: Brazil’s inflation eased slightly to 6.5% (y/y) in April, down from 6.6% (y/y) in March. Inflation remains near the upper-end of the central bank’s target of 2.5-6.5%.

Sub-Saharan Africa: Kenya's central bank cut its benchmark lending rate by 100 bps to 8.5%, resuming an easing path after pausing during the elections in March. This is the fifth cut in the rates since the easing cycle started in July of 2012.

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