Asian Market Rebound Limited By China

Asian markets seem generally higher today, but gains are limited by China's inflation data. The CPI rose more than expected by 2.7% yoy in June, compared to the consensus of 2.5% yoy. That is quite a sharp acceleration from May's 2.1% yoy. The figure is still staying below the government target of 3.5%, but there are concerns that the acceleration is starting to limit scope for further policy easing. Meanwhile, the PPI stayed negative at -2.7% yoy, suggesting that the economy is still struggling with over capacity and weak demand. There are still concerns over the drive to reform credit to restructure the economy.

Fitch noted in its Sovereign Review and Outlook that recent talk of the Fed's tapering and its uncertain exit path will generate periodic bouts of market volatility. It also noted the emerging markets, including bonds, currencies and equities were hit disproportionately hard. While Fitch doesn't expect widespread credit distress, there will be concerns over slowing growth, China's financial stability, softer commodity prices and a series of political shocks in some EMs. Fitch doesn't expect a rate hike from the Fed before mid-2015, but the prospect of tightening will increase risk facing weaker EMs.

In the eurozone, ECB president Draghi told the European Parliament in Brussels that the exit from the accommodative monetary stance is "distant". He reiterated the forward guidance that the governing council would keep rates at current or lower levels for an "extended period of time". Meanwhile, he noted that the central bank will see "what the market reaction has been, is and will be to this statement."

On the data front, U.K. BRC sales monitor rose 1.4% yoy in June, RICS house price balance improved to 21 in June. Australia NAB business confidence improved to 0 in June. U.K. data will be on focus today: Manufacturing Production m/m and the Industrial Production m/m. The NIESR GDP estimate will be released later in the day. The Swiss release retail sales data earlier, while Canada will release housing starts later in the day.