Strength in oil prices driven by tensions in the Middle East and North Africa heightened concerns over inflation. Gold rallied for a 6th consecutive on safe-haven and inflation -hedge demands. Policymakers in South Korea and the Eurozone voiced their worries on the issue. ECB President Trichet and council member Guy Quaden's speeches in Belgium later today may give some clues on the policy outlook. The market has priced in higher chances of an earlier rate hike, containing the weakness of the single currency. Apart from protests in the MENA region, another key event was the earthquake in Christchurch in New Zealand. The disaster has killed at least 75 people and the quake is expected to be the costliest for insurers since 2008. This also raised speculations that the RBNZ will need to adopt an easier monetary policy to stimulate growth.

With crude oil prices staying the highest level in 2.5 years, investors began to gauge its impacts on global economic recovery. In South Korea, Finance Minister Yoon Jeung Hyun said inflationary pressures may threaten people's livelihoods. In the 17-nation Eurozone, ECB's Yves Mersch and Nout Wellink also showed their concerns about the inflation outlook. In an interview in Luxembourg, Mersch noted that interest rates are at an exceptionally low level, which was 'warranted by an environment where there was anemic growth and even negative growth over a prolonged period, and therefore no inflationary pressures'. However, the 'situation has now changed' and this would mean that 'inevitably we also have to rebalance our monetary policy stance and we are fully aware that excessively low interest rates create distortions in the economy and are also likely to be a favorable field for asset inflation'.

Separately, in an interview with the WSJ, Wellink said while he does not 'worry about short-term developments' on inflation, 'the overall picture is not a picture' he likes very much. He also said that the ECB 'must be ready to act as appropriate to safeguard price stability'. Speculations that the ECB will hike rates were brought forward after hawkish comments from council members. Interest rate futures showed the market has first speculated the central bank will raise rates by +25 bps in August, compared with Monday when first hike was not seen fully priced in until September.

Geopolitical tensions and inflationary pressures are 2 key factors driving gold prices higher. Therefore, we are not surprised to see the benchmark Comex gold contract recapturing $1400/oz, the first time since January 4. Should central banks, especially those in the advanced world, fail to tighten monetary policies in light of higher inflation, the metal would accelerate its rally.

On the macro front, the BOE will release the minutes for the February meeting. While the decision of maintaining the Bank rate at 0.5% and the asset-purchase program of 200B pound has been digested, we are interested to see more members favoring tightening.