Asia shares up as China extends rally; Japanese yields a risk

Asian shares looked to end the month on a firm note on Monday (31 July) in a week littered with major economic releases, central bank meetings and earnings updates from mega-caps Amazon and Apple, though rising Japanese bond yields posed a risk.

China surveys were mixed with factory activity just pipping forecasts but services disappointing, though both merely reinforced expectations that Beijing would have to launch a larger stimulus at some point.

Chinese blue chips .CSI300 seemed unperturbed and added 1.6%, bringing gains for July to 5.6%.

MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS climbed 1.1%, having gained almost 6% so far in July to reach a five-month high.

The initial impetus for markets was positive following Friday's US data showing an easing in wage costs and core inflation, which fuelled hopes the Federal Reserve was done tightening.

"The data surprises bolster confidence that global core inflation - ex China - will fall sharply and set the stage for a developed market central bank policy pause and emerging market easing even if growth remains firm," said Bruce Kasman, head of economic research at JPMorgan.

Figures due this week include the US ISM surveys on manufacturing and services, the July payrolls report and European inflation.

The Bank of England is widely expected to raise rates by at least a quarter point, but markets are more divided on whether the Reserve Bank of Australia will hike or stay on hold.

Almost 30% of the S&P 500 report results this week and so far, earnings have been good enough to see the index extend its rally to 10% since the start of June.

S&P 500 futures ESc1 added another 0.1% on Monday, bringing its gains for July to almost 3%, with Nasdaq futures NQc1 near flat.

Apple Inc AAPL.O and Amazon.com AMZN.O both reported on Thursday, while other well-known names with results due include Western Digital Corp WDC.O, Caterpillar Inc CAT.N, Starbucks Corp SBUX.O, and Advanced Micro Devices AMD.O.

PARSING THE BOJ

Japan's Nikkei .N225 rose 1.8% to re-take the 33,000 level and nudge closer to its recent three-decade peak.

Investors are still pondering the implications of Friday's shock decision by the Bank of Japan (BOJ) to lift the lid on bond yields, in a step away from its ultra-easy policies.

Analysts at BofA estimate the BOJ's bond buying added $1.3 trillion to global liquidity in the past 18 months and provided a low floor for global rates, so any sustained rise in Japanese government bond yields could ripple through other bond markets.

Japanese 10-year yields JP10YT=RR climbed further to 0.6% on Monday, still short of the new cap of 1.0%.

While the yen had initially rallied on the BOJ move, it soon reversed course as investors still seemed happy to run carry trades, or yen-funded positions in higher-yielding currencies.

"Friday's action might best be viewed as an attempt to head off a fresh wave of yen-weakening carry trade activity, by at least ceasing to resist pressure for 10-year yields to rise above 0.5%," said Ray Attrill, head of FX strategy at National Australia Bank.

"Friday's actions do, though, fail to provide a catalyst for a secular reversal of yen weakness."

The yen was again under pressure on Monday as the dollar pushed up to 141.55 yen JPY=EBS, a long way from Friday's brief low of 138.05.

The euro had also recovered from its initial pullback to stand at 155.97 yen EURJPY=, while steadying at $1.1020 EUR=EBS after some wild swings last week.

In commodities, gold was off a shade at $1,957 an ounce XAU=, having gained around 2% for the month so far. GOL/

Oil prices took a breather, having been for five weeks in a row as production cuts by OPEC+ tightened supply. O/R

Brent LCOc1 was off 14 cents at $84.85 a barrel, while US crude CLc1 eased 3 cents to $80.55.