Asia shares edge higher, China disinflation a drag

Asian share markets edged cautiously higher on Monday (10 July) as investors looked ahead to a key reading on US inflation and the start of another corporate earnings season.

Chinese consumer price figures surprised on the soft side with inflation falling in June and essentially unchanged from a year before.

The miss implies there is plenty of scope to ease monetary policy further, but also underlines the challenge Beijing faces in reflating its economy and avoiding a deflationary spiral.

The yuan pared early gains on the news, though Chinese blue chips were still up 0.7% .CSI300 on hopes for a loosening in regulations for the tech sector. Shares in Hong Kong's Alibaba Group 9988.HK also joined the rally.

The gains in China helped MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS firm 0.6%. Japan's Nikkei .N225 eased 0.7% in the wake of a higher yen, while South Korea .KS11 added 0.2%.

EUROSTOXX 50 futures STXEc1 dipped 0.1% while FTSE futures FFIc1 held steady. S&P 500 futures ESc1 and Nasdaq futures NQc1 both dipped 0.2%, adding to last week's losses.

Earnings season starts later this week with JPMorgan Chase JPM.N, Citigroup C.N, Wells Fargo WFC.N, State Street STT.N and PepsiCo PEP.O among the names reporting.

"Consensus expects a 9% year/year decline in S&P 500 EPS driven by flat sales growth and margin compression," noted analysts at Goldman Sachs.

"We expect companies will be able to meet the low bar set by consensus," they added. "Negative EPS revisions for 2023 and 2024 appear to have bottomed and revision sentiment has improved."

This week also has major data on US consumer prices which is forecast to show headline inflation slowed to its lowest level since early 2021 at 3.1%, with the core easing to 5.0%.

Markets still think the Federal Reserve is likely to hike rates later this month, but a weak CPI might lessen the risk of yet a further move in September.

Currently, futures imply around a 90% probability of a rise to 5.25-5.5% this month and a 24% chance of a move in September.

Fed officials have been mostly hawkish in their communications, while markets have also priced in higher rates in Europe and the UK. Canada's central bank meets this week and markets imply a 67% chance of another hike. 0#BOCWATCH

The risk of higher global rates for longer has caused havoc in bond markets, where US 10-year yields jumped 23 basis points last week, German yields 24 basis points and UK yields 26 basis points.

Early Monday, US two-year yields US2TY=RR stood at 4.957%, having hit a 16-year high of 5.12% last week.

The jump in developed-world yields caused ripples in currency markets, particularly in carry trades where investors borrow yen at super-low rates to invest in high-yielding emerging market currencies.

The net result was a rush to close yen short positions which saw the Japanese currency rally across the board last week.

The dollar was a shade firmer on Monday at 142.46 yen JPY=EBS, after sliding 1.3% on Friday, while the euro held at 156.18 yen EURJPY=. The single currency was also firm on the dollar at $1.0960 EUR=EBS.

One of the most popular carry trades has been short yen and long Mexican peso MXNJPY=R, and the shakeout saw the peso dive 1.8% on the yen on Friday.

In commodity markets, gold was steady at $1,924 an ounce XAU= after making a slight gain last week. GOL/

Oil prices eased slightly, having touched nine-week highs last week as top exporters Saudi Arabia and Russia announced fresh output cuts. O/R

Brent LCOc1 fell 15 cents to $78.32 a barrel, while U.S. crude CLc1 lost 26 cents to $73.60.