European shares jumped on Monday after a key economic report for the region showed a fall in inflation – an optimistic kick-off for a week littered with major economic data, central bank meetings and earnings updates.
Euro zone inflation fell further in July and most measures of underlying price growth also eased, in a largely comforting sign for the European Central Bank (ECB) as it considers ending a brutal string of interest rate hikes.
Germany’s blue-chip stocks index hit a record high at one point and was last up 0.3% (.GDAXI). The pan-European STOXX 600 index (.STOXX) rose by 0.1%, heading for a second consecutive monthly gain.
This lightened the mood in markets after China’s manufacturing activity fell for a fourth straight month in July, as demand remained weak at home and abroad, official surveys showed on Monday.
“Markets are treating information with a lot more sensitivity and people are looking into new information with a detailed eye,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers.
Figures due this week include the U.S. ISM surveys on manufacturing and services, as well as the July payrolls report.
The Bank of England is widely expected to raise rates by at least a quarter point, but markets are more divided on whether the Reserve Bank of Australia will hike or stay on hold.
Almost 30% of the S&P 500 report results this week and so far, earnings have been good enough to see the index extend its rally to 10% since the start of June.
Futures on both the S&P 500 and the Nasdaq 100 were flat.
Apple Inc (AAPL.O) and Amazon.com (AMZN.O) both report on Thursday, while other well-known names with results due include Western Digital Corp (WDC.O), Caterpillar Inc (CAT.N), Starbucks Corp (SBUX.O), and Advanced Micro Devices (AMD.O).
PARSING THE BOJ
Japan’s Nikkei (.N225) closed up 1.26% to re-take the 33,000 level and nudge closer to its recent three-decade peak.
Investors are still pondering the implications of Friday’s decision by the Bank of Japan (BOJ) to lift the lid on bond yields, in a step away from its ultra-easy policies.
Analysts at BofA estimate the BOJ’s bond buying added $1.3 trillion to global liquidity in the past 18 months and provided a low floor for global rates, so any sustained rise in Japanese government bond yields could ripple though other bond markets.
Japanese 10-year yields surged to a nine-year-high up to 0.6% on Monday, and toward the new cap of 1.0%. That also put upward pressure on Treasury yields, where the 10-year rose 2 basis points to 3.98%.
While the yen had initially rallied on the BOJ move, it soon reversed course as investors still seemed happy to run carry trades, or yen-funded positions in higher-yielding currencies.
“Friday’s action might best be viewed as an attempt to head off a fresh wave of yen-weakening carry trade activity, by at least ceasing to resist pressure for 10-year yields to rise above 0.5%,” said Ray Attrill, head of FX strategy at National Australia Bank.
Traders cut their bets on a continuing rally in the pound by the most since mid-June ahead of the Bank of England rate decision on Thursday.
Sterling has surged 24% from a record low of $1.033 against the dollar in September after a disastrous budget, hitting a 15-month high of $1.314 in mid-July.
The euro gained 0.1% to 1.1028 dollars as did the dollar index rising 0.1% to 101.700.
In commodities, gold dropped 0.2% to $1,955 an ounce , but still 1.8% higher for the month so far.
Oil prices took a breather with brent flat at $85.00 a barrel, while U.S. crude rose 18 cents to $80.78.
