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Yields slip back on China deflation concerns

Further weakness in yields has helped to procure a second successive day of gains for European markets, despite a slide in Asia markets after Chinese inflation slipped further towards deflation.

Europe

Even the FTSE100 is managing to eke out some gains today after losing further ground on Friday, rebounding from levels just above its March lows, despite seeing a drag from the basic resource sector.

UK gilt yields have fallen back for the second day in succession the first time in over a month we’ve seen 2 successive days of declines in a sign that perhaps we may have seen the highs in the short term.

With the topic of interest rates increasingly becoming a national obsession with speculation over how high they are likely to go, wouldn’t it be ironic if we’ve already seen a short-term peak, just as the topic goes mainstream.   

Today’s notable performers have been the big caps of BP and Shell, despite lower oil and gas prices.

Water utilities are also seeing some modest gains after Thames Water announced it had managed to obtain additional funding of £750m until 2025, as it announced its latest full year numbers. This has helped to lift the likes of Severn Trent and United Utilities, which saw some significant declines last week over fears that the sector might find itself nationalised.  

The main laggards have been in property and commercial real estate after HSBC warned that the property market is in a precarious state, downgrading British Land, Land Securities to “reduce” and Hammerson to “sell” Segro is also looking soft along with Rightmove.   

US

US markets opened modestly higher today as they look to bounce back after last week’s losses. There’s been a slightly more measured start to trading this week after the volatility of the last few days settles down and yields slip back from their recent highs.

Meta Platformsshares have continued to look resilient as it emerged that its new platform Threads had attracted 100m users since its Wednesday launch. These are certainly impressive numbers but there is a sense that this may have been driven by curiosity alone as existing Instagram migrate over to have a peek. The key test is whether the new app is able to cannibalise the user base of Twitter. Early indications suggest it may be a struggle, given the lack of a desktop app, as well as the ability to curate lists.

Rivian shares look set to continue their recent winning streak, as it looks to close higher for the 9th day in a row.

US banks are also in focus this week as we get set for the latest Q2 numbers from the likes of JPMorgan Chase, Citigroup and Wells Fargo on Friday. Comments from Fed governor Michael Barr, who is chair for banking supervision, that the big banks may need higher capital requirements in the coming years doesn’t appear to impact on share prices now    

FX

It’s been a mixed day for the US dollar seeing a modest rebound against the likes of the Australian and New Zealand dollar after this morning’s weak China inflation numbers.

The pound is also slipping back after hitting one-month highs against the greenback at the end of last week, with some labour market data showing signs that wage growth is slowing and that the pace of hiring is slowing. If this is replicated in the labour market data due tomorrow morning, we could start to see some of the more extreme pricing for Bank of England rate rises get priced out.

The Japanese yen has undergone a later afternoon surge on what seems more of a technical move than anything else. Last week saw the USD/JPY post its biggest weekly decline since March, and having slipped below 142.50 we could well see further weakness towards 140.00 in the coming days.

Commodities

Crude oil prices have slipped back from one-month highs on the back of another set of weak Chinese inflation numbers. Having come off the back of two weeks of gains, the same old concerns over weaker demand are serving to help cap gains. Prices are also being pressured by reports of weaker demand from petrochemicals, because of a plastic glut. British oil giant Shell recently announced that its chemicals division would make a loss in Q2 in a trend that was replicated last week by losses for various European chemicals companies in last week’ s stock market sell-off.  

Despite the slide in yields being seen today gold prices are struggling to push higher, with the gains being seen in stock markets acting as a drag on the yellow metal. All eyes remain on this week's US inflation numbers, which if they continue to show signs of softening could help establish a floor for gold prices.

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