U.S. equity markets are trading sideways-to-lower at the mid-session while seemingly waiting for a catalyst to trigger its next move.

Last night’s news that China’s inflation was higher than expected, fueled speculation of a rate hike which helped drive down demand for higher yielding assets. The lack of follow-though to the downside, however triggered a short-covering rally which is helping to boost equity prices from their early morning lows. The March E-mini S&P 500 is still in a position to challenge its January high of 1148.00, but so far aggressive buyers have been scare. The daily swing chart suggests a breakout over this level will ignite a rally to 1156.00 by March 12th.

June Treasury Bonds have recovered earlier losses and are now trading better. Earlier traders sold Treasuries in anticipation of a rate hike by China. The inability to break -through yesterday’s low at 115’27 triggered a short-covering rally. Technically, this market picked up strength after regaining a 50% line at 116’04. This price will dictate the direction of the market into the close. Holding above it means the market is discounting the Chinese news. Falling below it will indicate a further drop to 115’06.

The weaker Dollar is triggering a short-covering rally in April Gold. Technically this market is in a position to post a minor closing price reversal bottom. Oversold conditions are also contributing to the possibility of a turnaround. A late session resumption of downside pressure could drive this market to the recent bottom at $1088.50.

June Crude Oil is trading slightly weaker. A decline in demand for higher risk assets is behind today’s weakness as well as overbought conditions. Technically, this market is beginning to weaken. The charts indicate there is room to the downside, but the weaker Dollar and firm Euro is helping to limit losses.

The U.S. Dollar is trading mostly lower as Forex traders seem indecisive about taking a side in the market today.

At times, traders have been demanding lower yielding currencies perhaps in response to an overnight report that showed China’s consumer-price index spiked higher in February. Investors have been speculating since the release of the report showing that its central bank will raise interest rates to curb economic growth. The inflation report showed an acceleration from the year-earlier month, to a greater-than-expected pace of 2.7%. The higher growth was tied to greater-than-expected gains in fixed-asset investment, bank lending, and industrial production.

Today’s U.S. economic reports, international trade and weekly job claims, were mixed, but pressure has been on higher yielding assets anyway. Several times today all four major asset classes - the Dollar, Gold, Stocks and Treasuries - were trading lower. This action suggests that there may be a quarterly rebalancing or reallocation taking place.

The March Japanese Yen has seen choppy, two-sided trading. It rallied on speculation that China may have to hike interest rates to curb but then broke when U.S. equity markets weakened.

The March Canadian Dollar is trading slightly lower at the mid-session after reaching its lowest level since October 2009. Overbought conditions and less demand for higher risk assets is helping to contribute to the weakness. The bigger picture still suggests that the stronger currency is the Canadian Dollar. Higher oil prices and the prospect of rising Canadian interest rates have helped increase the view that the Canadian Dollar could test parity. Investors are beginning to believe that the Bank of Canada is likely to hike interest rates before the Fed.

The March Euro is trading better at the mid-session. Technically this currency is trading in a range and building a support base while waiting for a catalyst to trigger an upside breakout. The easing of fiscal tensions in Greece is contributing the most to the developing bullish tone. Traders seem to be waiting for some event to shake up the record number of shorts in the market in order to trigger a short-covering rally.

The Swiss National Bank voted to leave interest rates at historically low levels while reiterating its stance to intervene decisively if necessary to protect the currency. It also raised its outlook for 2010 inflation from 0.50% to 0.70%. The direction of the March Swiss Franc is being controlled by the movement of Euro.

The March British Pound is trading better after a Bank of England report predicted that inflation would be 2.5% this time next year. This projected increase was slightly better than the November guess of 2.4%. This market has been able to hold onto most of its overnight gains, but traders shouldn’t read too much into today’s action. Shorts still feel that there is much more potential to the downside because of the weak economy, political uncertainty and the BoE’s dovish tone.