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Bond sell-off eases and equities find support

Europe’s sovereign bond markets are keeping their poise, the region’s stocks are higher and data from China is drawing attention back to the prospects of the reflation trade.

The ripples created by moves from the European Central Bank to open the way for an end to the era of ultra loose monetary policy are waning across global markets.

It comes as attention moves back to inflation data for signs that the move out of bonds and into stocks in anticipation of a deepening economic recovery — the so-called reflation trade — has further to run. Price growth in China steadied in June, casting some doubt on its ability to drive global inflation, at a time when faith in the Trump administration to pass legislation for tax cuts and fiscal stimulus is also faltering.

Meanwhile, the wave of selling at the prospect of the reduction of the ECB’s monthly €60bn stimulus spending in the eurozone sovereign debt market has calmed, and yields, which fall when prices rise, are easing across the shared currency area.

Germany’s 10-year Bund yield is down 1 basis point at 0.563 per cent, easing back from Friday’s 18-month high.

The yield on France’s equivalent debt is flat at 0.937 per cent, while Spain’s is down 1 basis point at 1.712 per cent.

The yield on Japan’s equivalent note rose 1bp to 0.094 per cent, while the yield on 10-year US Treasuries is down 1 basis point at 2.3838 per cent.

“The sell-off in government bond markets should begin to run out of steam,” says analysis from Citi. “Value will ultimately prevail.”

European bourses are getting off to a stronger start. The FTSE 100 is up 0.4 per cent in London, as is the Xetra Dax 30 in Frankfurt. The region-wide Euro Stoxx 600 is up 0.3 per cent, with banks and oil companies supporting the rally.

Stocks in Asia are higher, helped by a spate of dealmaking in Hong Kong, including the $9.3bn sale of hotels owned by Dalian Wanda to Sunac China Holdings. The Hang Seng is up 1 per cent, outperforming the Shanghai Composite’s 0.1 per cent advance. Tokyo’s Topix is up 0.5 per cent.

The dollar is slipping back in initial European trade.

The euro has ticked back over $1.14, up 0.1 per cent at $1.1405. The pound is also up 0.1 per cent, at $1.2895. Against the euro, sterling is flat at £0.8842.

The yen is above the ¥114-mark, hovering just above ¥114.2 on Monday, its weakest against the dollar in nearly two months.

Oil prices were on the rise after finishing last week on a lacklustre note.

Brent crude is up 0.3 per cent at $46.86 a barrel, having dropped 2.5 per cent over the course of last week.

West Texas Intermediate, the US marker, is up 0.3 per cent at $44.34, after closing last week down 3.9 per cent.

Gold is down 0.5 per cent at $1,206.37 an ounce, its lowest since March

Geoff Yu, head of the UK investment office at UBS Wealth Management, says:

Global inflation numbers will shed further light on whether the reflation trade still has legs, in light of softening commodity prices and signs that the cycle is peaking.

Chinese inflation numbers were slightly softer than expected, again a warning that the country is not going to resume its traditional role as a global reflator in the near future. On the other hand, stocks are generally doing well, enjoying the tailwinds of Friday’s US payrolls numbers, in another sign that fear of a tighter Fed is probably softer in practice. Ultimately, a strong US labour market can only be good news for global demand and that should continue to anchor risk.