Asia concerned about US inflation and earnings tests

Asian share markets cautiously gained ground on Monday as investors awaited a crucial U.S. inflation report and the start of the corporate earnings season. Bond markets remained unsettled following a recent sell-off, which pushed yields to multi-year highs in developed countries, reducing the appeal of equities. The surge in yields also put pressure on popular carry trades in the currency market, leading to a rally in the Japanese yen at the expense of the U.S. dollar. Against this backdrop, the MSCI Asia-Pacific index outside Japan saw a marginal increase of 0.1 percent in early trading. The Nikkei in Japan rose 0.3 percent, while South Korea’s index gained 0.1 percent. S&P 500 and Nasdaq futures were mostly flat after a modest retreat last week.

This week marks the start of the earnings season, with JPMorgan Chase, Citigroup, Wells Fargo, State Street, and PepsiCo among the major companies reporting their results. Goldman Sachs analysts expect a 9-percent year-on-year decline in S&P 500 earnings per share (EPS) due to flat sales growth and margin compression. However, they believe that companies will be able to meet the low market expectations, and they note that negative EPS revisions for 2023 and 2024 seem to have bottomed out and revision sentiment has improved.

The U.S. consumer price index (CPI) data, which is due this week, is also closely watched by the markets. It is forecasted to show a slowing of headline inflation to its lowest level since early 2021 at 3.1 percent, with the core CPI easing to 5 percent. The Federal Reserve is widely expected to raise interest rates later this month, but a weak CPI report could lower the risk of another rate hike in September. Currently, futures imply a 90-percent probability of a rate increase to 5.25-5.5 percent this month and a 24-percent chance of a move in September. Central banks in Europe, the UK, and Canada are also expected to raise rates, adding further pressure to bond markets.

The surge in global yields last week had a significant impact on currency markets, particularly carry trades involving the Japanese yen and high-yielding emerging market currencies. Investors rushed to close their yen short positions, leading to a rally in the Japanese currency. The dollar was trading at 142.30 yen, down 1.3 percent from the previous week, while the euro remained stable against the dollar at $1.0962.

In commodity markets, gold prices held steady at $1,923 an ounce after a slight gain last week. Oil prices eased in early trading after reaching nine-week highs. Saudi Arabia and Russia announced fresh output cuts, supporting prices. Brent crude fell 35 cents to $78.12 a barrel, while U.S. crude lost 40 cents to $73.46.



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